Conversation with Phil Magness -- Trade & Tariffs Today & in History | Yaron Brook Show
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uh to uh to have uh phil magnus here uh am i pronouncing that right oh that is correct happy to be here great phil is a senior fellow at the independent institute out in california although he doesn't live there uh he's the david thoreau chair in political economy he's of there's a senior research fellow at the american institute for economic research as an academic program director at the institute for humane studies

and an adjunct professor of public policy in the School of Public Policy and Government at George Mason. And he received his PhD at the George Mason University School of Public Choice. So welcome. Thanks. Thanks for joining us. Absolutely. So I'm curious, to put aside a side of trade, at George Mason School of Public Policy, is it as free market oriented as the economics department is?

Unfortunately, no. There is some history where some free market professors that had been involved in the economics department did teach there at the time that I went there, but it's a very typical political science department, I'd say. Oh, okay. That's too bad. But you got the benefit of some of these things. Exactly. I was there at the right time and at a very good moment, and it's up-fielded.

So I figured today what I'd like to start with is talking a little bit about the history. There's a lot of confusion and I think a lot of misinformation out there about the history, American economic history. And, of course, the Trump administration justified the tariffs as raving about the 19th century. And so I'm curious. So the founding fathers, I mean, really in the early part of the republic, early 19th century,

The government was mostly funded by tariffs. Yeah. Looking back and doing kind of the economic analysis of that, was that a good idea, bad idea? And how can we tell?

Yeah, so it is something that originates with the very first revenue system of the United States. That's one of the major reasons why they bring together the Constitutional Convention is to get a national tax system for the full government of the country. Previous to that, it was based on state contributions that they would send sometimes voluntarily, other times they wouldn't pay at all.

But the idea was set up a national tax system, and a tariff became appealing because it was the easiest system to enforce. It involves very low level of administrative state. You just have to set up customs houses at the ports, basically collect the ports of entry.

This is something historical. We see in any state that has very low capacity to collect taxes, tariffs tend to be one of the favored mechanisms. And that's what we got. It was also kind of enshrined in the Constitution as one of the enumerated tax powers. There were restrictions at the time. You could not tax income directly since before the 16th Amendment. So really, the first revenue system of the U.S., it's usually about 50%, if not higher, of

of federal taxes come in are taxes on imports, their tariffs. Remainders kind of split between like excises on alcohol and tobacco and usual things like that. But it's the dominant tax system up until 1913.

Was a sale tax really impractical in a sense that you couldn't track it? Right, right. Because you couldn't do – I mean, the tracking of it would be nearly impossible, especially at that time in history. I mean, you'd have to have a revenue agent in every little town collecting taxes on sales. Whereas the port of entry, you have a manifest of all the goods that are on board the ship. You can calculate a price there.

You can calculate how much of a percentage goes to the tax. And to unload at the dock and the port, you go to the customs collector and you get stamped for approval or stamped to enter it into a warehouse. And that basically means it's legitimate. And was there thriving smuggling business as a consequence? There was, especially very early on. And there was a great concern at the Constitutional Convention that if they raised the tariff too high, it would encourage smuggling. Yeah.

Especially if you've got this wide open frontier. You've got the Mississippi River, a lot of ports of entry on that and places that you can unload things overnight. Of course, as the country develops more, that tendency towards smuggling goes down. But it's certainly in the back of their minds very early on. And what were kind of the rates early on?

So they initially intended it to be relatively low. James Madison proposes the very first tariff in 1789. It's one of the first bills that they put before Congress. They thought it was going to be a very low uniform rate, and they left it blank on the bill. But Madison's letters indicate that he thought it was going to be about 5% just across the board on all imports. So it was like a de facto sales tax on imports. Mm-hmm.

But then the protectionist interests start getting in there and say, well, you can do 5% on everything else, but we have iron in our home district. Can you tax that at 10% and give us an advantage over our competitors abroad? So it's really the origin of special interest lobbying in Washington, D.C. as well is from these early tariff bills because they figure out that they can start varying the rates.

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So how early – I mean, was this really right at the beginning that kind of the pressure groups start? So they emerge in that very first bill, but it's a very light type of pressure group. It's only a couple percentage points higher than the base rate. Okay. You don't really get into the heavy protectionism that emerges as a philosophy in the 1820s.

So the first really about 30 years or so of the government's existence, it has a revenue tariff and a little bit of protection around the edges. These are in times of peace. Of course, there's embargoes in times of war that cut off trade. But in times of peace, the tariff is pretty low.

So, you know, the Trump administration talks a lot about the McKinley economy. Yeah. The McKinley tariffs. This is the 1890s, they take it? Yes, exactly. Exactly. So tell us a little bit about the tariff and then what do they mean by the McKinley economy?

Yeah. And so after the American civil war, uh, there, there are actually, it's during the civil war, a whole bunch of new tariffs come into play, uh, right on the eve of it. The morale tariff act has passed. And then during the war, there's a mixture of war finance measures, but also the special interest. They, they kind of realize, Hey, if we're jacking up taxes for the war, we can also get our fingers involved in the setting the rates and do something favorable. So, uh, really what happens is after the war is over, uh, those interests are entrenched. Uh,

They've become a part of the Washington fixture. And really for the remainder of the 19th century, they're there. Every time Congress revises the tariff schedule, it's like a call goes out to all the vultures and they descend on the Capitol building and try to get their favorable rates. So William McKinley is a member of the House of Representatives. He's in Congress and becomes basically the architect of

of a major tariff revision. This is in 1890. The interesting thing about McKinley is he took an already pretty high protective crony entrenched tariff system that they had been fighting over for several decades, and he was seen as going into even excess beyond what Washington would tolerate.

So there are several instances of this in the 19th and early 20th centuries as Congress overreaches. And instead of just like feigning that they're going to do a revenue revision with a little bit of protection on the side, it's just open the doors wide to all the special interests to come in. McKinley does that in 1890. You get a really cronyist increase in the tariff schedule, and there's huge voter backlash against it.

People are basically kind of disgusted and they throw the Republican Party out of office in the next election. The same pattern repeats itself in 1909 with the Payne-Aldrich Tariff.

You may recognize the name Nelson Aldrich. He's the architect of the Federal Reserve. He's also an arch protectionist senator from Rhode Island. And he did the same thing McKinley did two decades earlier in 1909. And there's such a heavy backlash against it. The Republicans get thrown out of office in the next two elections, and the Income Tax Amendment is ratified to be an alternative to the tariff system.

So I don't know if people know this, but it's the Republican Party that is the party of tariffs. Absolutely. In that era. In the 19th century and early 20th century. Yeah, absolutely. And that comes out of the deep history. They kind of grew from the Whig Party. Mm-hmm.

and the Henry Clay wing of the Whig Party. And Henry Clay, you go all the way back in 1824, he is the father of American protectionism. Uh, he's the first to really, uh, drive and, and make this major push for, well, we should have tariffs not just for revenue, we should, uh,

basically design the industrial future of the economy, centrally plan the economy. And we use tariffs as one of the levers to do that. He also likes central banks. He also likes public subsidies. He's in favor of all these mass infrastructure expenditures and building ports and eventually canals and railroads. And what's the government's hand in everything? So when did the Democrats and Republicans flip?

Yeah, so it's after World War II, really. So the Republicans are the high-tariff party all the way through the 1920s.

And they made the major mistake and they outsaid the Great Depression. The stock market crashes and they went back to the Henry Clay playbook and that said that if you're in a recession, your stimulus package is to lock down America, to build up walls around the economy from competition with the rest of the world and weather the recession. So after the stock market crash, they passed the Smoot-Hawley Act.

And it's just a catastrophic backfire. It starts a trade war with all of our major trading partners, and they retaliate against us at a time the U.S. economy is already faltering. Our major export at that era was agricultural goods, and the agricultural economy of the Midwest and the Great Plains is not in great shape. At the outset of the Depression, while all these other countries start putting tariffs on it, it just leads to a domino effect. Mm-hmm.

that cascades across the center of the country. And then next thing you know, you've got farm mortgage defaults and runs on banks and just a catastrophe after catastrophe. So it's four years of this go by. Republicans get swept out of office in 1932 for both this mistake. They did another thing. They tried to raise income tax rates to balance the budget, contractionary fiscal policy in the middle of a depression. Yep.

Not a good idea either. So it's like a double mistake. But they get thrown out of office for it with good reason. And FDR, for all of his problems, one of the few things he did right, he appointed a Secretary of State, Cordell Hull, who's an old free trade Democrat. And Cordell Hull basically gets Congress to pass a series of package of legislation that allows them, allows the executive branch to negotiate its way out of Smoot-Hawley.

So it says turn it over to the State Department. It's basically saying, Congress, you screwed up. Empower the State Department to seek reciprocal trade agreements with other countries, and we'll pass them through Congress. This sets everything into motion. So after World War II, return of peace, they settle on the GATT agreement, the General Agreement on Trade and Tariffs, which is an extension of this Cordell Hall philosophy on the Democratic Party side.

The switch starts to emerge really in the 1950s when the Democrats become kind of the pro-labor interest. You know, they're propping up labor unions, and what do labor unions want? Well, protection for the home industry. Yeah.

And Republicans start shifting over into just a more general free market philosophy. Imperfect, but nonetheless, it's like a backlash against the interventions of the New Deal. So by the mid-20th century, the two parties have gone in the other directions.

By the end of the 20th century, the Reagan era and beyond, you have the leading protectionists are Dick Gephardt. If anyone remembers him, he was the House leader on the Democratic side for most of the 1990s, and he was this arch protectionist.

We need to put tariffs to prop up my labor unions back home in my district, whereas the Republicans are, well, we've embraced the philosophy of free trade, at least nominally, and generally negotiated this tendency toward lower tariffs worldwide. All right, so we'll get to what the situation is today with the parties, but I want to go back to McKinley.

So there's a lot of talk about, look, we had tariffs during that era, very high tariffs, you know, much higher than we had in the 20th century. And the economy grew really fast and productivity increased and things could –

And they draw a causal relationship between the two. So what do we know and how do we know it about the effect of tariffs on the economy and how the economy grew in spite of the tariffs? Yeah. Well, this is a very bizarre claim. As you said, they see correlation and they assume causation. Well, the tariffs must cause prosperity. I look at that error and I say, wait a minute. We had no central bank.

We had very low regulatory environments around the federal government for sure and also at the state level. No federal income tax, very low spending. We generally had a free and relatively open immigration system. We had just very few areas where the government was messing around in the economy at

And yet they look at it and they say, well, all those different things, tariffs must be the cause of this? It's frankly insane, the level of causality. It's like they glommed onto this one policy that they happen to like, and therefore they assert that it must be the reason for prosperity. Well, the reality is much more complicated than that. You look at the industries that grew in that era.

And it's a time of very heavy technological innovation. Electricity has been basically converted into something that's useful. It's no longer just a quirk of science. It is now something that you can run machinery on. Electrification is taking place. Transportation has taken off in leaps and bounds.

And that's everything from the steamships to railroads to new means of transport, eventually the automobile. All of this starts to come into play between really the end of the Civil War and the turn of the century. So it's a very vibrant time in the U.S. economy. And what you do, if you look at all these different industries that are growing, there's a general upward trajectory in growth.

But you can compare industries that are relatively insulated from trade and tariffs. So like electricity, they didn't really have a way to put electricity under a tariff at that time. The energy sector, there's really not any way to do that. And yet you compare that against certain types of steel production.

And it turns out that the non-tariffed industries, their rate of growth is faster than the tariffed industries. So you wouldn't expect that. If tariffs are the cause, they would say that the steel industry should be the fastest growing thing in America, not the electricity sector. You also see other effects, especially very heavy machinery, heavy capital goods,

there's some evidence that the tariffs on those prevented the importation of machinery from Europe at that time, and it actually puts a drag on some of the industrial sector. So you start comparing sector by sector, digging beneath the surface, and this tariff argument, it just doesn't hold up. I mean, it's a flimsy post-hoc rationalization of a policy they like for other reasons.

Yep. And what was the justification at the time? I mean, at the time where economists, I mean, this is post Wealth of Nations, post Ricardo. Are there economists defending this or is this pure political economy? Is this pure cronyism?

Yeah. Uh, so there are a few economists that are defending it. They're in the, in the minority. Uh, although unfortunately they're based in the United States. So Henry C. Carey is probably the preeminent protectionist economist of the 19th century U S uh, and he comes out of this Henry Clay tradition that we need to centrally plan certain areas of production. And his whole thing is we need to harmonize the interests of the country. Uh,

The agriculture sectors need to supply raw materials to the industrial sectors, which sell their goods to... It's like this whole... You imagine him as like this...

He's almost like a Rand villain sitting there in a room trying to manipulate everything and centrally plan through a bureau. And this guy was addicted to tariffs. Every time a problem came along, he said, oh, tariffs will solve that. And I'm not making this up. On the eve of the Civil War, he says, well, slavery is a problem. Tariffs will solve that. So it's like tariffs are his only tool to...

that everything looks like it's a protected industry. So you do get that, but by the mid to late 19th century, the economics profession has swung completely in the Adam Smith, David Ricardo direction. There are very few academic economists that are arguing for tariffs. William Graham Sumner is emerging as kind of one of the leaders of the American economics profession. He's a loss-I-fare free trade guy, basically, by background.

And what you get is the academic economists are all saying this policy that you've adopted, it's harming the economy. But they knew and they recognized at the time they weren't going up against competing economists. They were going up against industrial special interest groups. They were going up against really a sector, a concentrated political sector in the Northeast.

Yeah.

and people got so sick of the cronyism, they were like, well, we need to try something new, and they floated the income tax. Interesting. Well, you can have an income tax that applies nationwide...

at least that would be more equitable was the idea. And Sumner even, I mean, he's a laissez-faire guy, even endorses the income tax proposal at this point because he thinks the tariff is so insidious. Yeah. And it's still true that sales taxes are still too difficult to collect, I assume. Exactly. Exactly. But then we get the income tax and we get Smoot-Hawley. So we got, as usual, we get them all.

Yeah, so they amended the Constitution to create a new tax. They didn't amend it at the same time to bar the old tax. So yeah, that's the problem. You try to swap one for the other, you end up with the worst of both worlds. You end up with high income taxes and high tariffs. And they learned that, unfortunately, the hard way. Was there a credible alternative to...

to the tariff in the 19th century, given the size of government, you didn't have to raise that much revenue. What could have been an alternative to it? Well, there are some experiments with a very low stable tariff. Mm-hmm.

Uh, they occur, uh, uh, so the most notable ones in 1846 under the, the, the Polk administration, he comes into office with basically saying, we're going to repeal the wig tariff agenda and he succeeds largely. Uh, so for, uh, basically between then and the start of the civil war, tariffs are relatively low and there's some successive, uh, reductions in the rate. It's a time of high commerce, uh, especially with Britain, which had just repealed its corn laws the same year. Uh,

So you start to get an integrated global economy from that, and it's sufficient to meet basically most of the revenue needs of the federal government. It is Ryan Seacrest here. There was a recent social media trend which consisted of flying on a plane with no music, no movies, no entertainment. But a better trend would be going to ChumbaCasino.com. It's like having a mini social casino in your pocket. Chumba Casino has over 100 online casino-style games all online.

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Was Grover Cleveland good on the issue of tariffs? Yeah. So Cleveland was actually one of the great articulators of free trade. The problem he runs into is every time he attempted a tariff reform, the lobbyist would descend and they'd carve up his bill and reinstitute kind of through the back door the higher rates that they had previously enjoyed under McKinley and some of the other tariffs of that era. Yeah.

So there's a very famous incident, the Wilson-Gorman tariff that comes in under the Cleveland administration, and it does reduce rates, but

but it had been so bogged down in all of this cronyism that Cleveland basically lets it become law without a signature because he doesn't want to be associated with that. And who are the major cronies in this time? What industries are most responsible? It's always the steel and iron industry. They're the infant industry of America since 1789, and they've never grown up as the—

which is, so even under Carnegie and, and, and, and, and these, these giants of industry that they're still crony. Uh, there, there's quite a bit of it. And it's actually a lot of the smaller firms. Okay. Um, in particular, uh, you know, Bethlehem steel was, um,

a major steel producer for hundreds of years in the United States. And basically the entirety of its existence is spent sending lobbyists to Washington, DC to get favorable steel rates. So you got that sector textiles in new England or another big one, a lot of mill towns and things like that, including companies that no longer exist were deeply involved in the tariff schedule. And,

And, uh, you can go back and read some of the letters when, uh, like when Nelson Aldrich is revising the tariff or Justin Murill or William McKinley, uh, in their archives, there are letters and they're all these little firms sending, um, uh, say, here's the desired rate schedule that we would like. Uh, by the way, would you like a free sample of our product? Uh, and by the way, I'm sending someone else as well to come talk to you. And there's probably a bag of money being, uh, exchanged under the table. Uh,

Well, today they just have to buy a meme coin, so it's easy. Yeah, exactly. Much easier today. So one other question about this. Smoot-Hawley. So I just read William Bernstein's book on trade, his history of trade, and he makes the argument in that book that, you know, Smoot-Hawley didn't really have that big of an impact on the Great Depression, and he kind of presents it as,

Great Depression was caused by the Fed, and most economists today think that Smoot-Hawley had very little impact. Is that your understanding? Do you think that's true? I'd push back on that. So I certainly wouldn't claim that Smoot-Hawley caused the Depression, but the timeline just doesn't work. Sure. It's a reaction to other things.

There's definitely monetary mismanagement that is probably the main original trigger of the depression. And that monetary mismanagement continues for several years. They're basically operating in a contractionary monetary situation. Oops, you've frozen. Hopefully we'll get you back in a minute. We're talking to Phil about the Great Depression. You guys in the chat,

Oh, yeah, you froze again. So you were saying, you were talking about the monetary contraction as being the initial cause and that it went on for many years. Yeah, yeah. So basically what Smoot-Hawley does is it throws gasoline on them. So it, yeah. Not sure what's going on with Phil's internet connection. It's going kind of in and out. Am I stuck or is Phil stuck? Who is frozen? Okay.

You're back again. I don't know. Yeah. I mean, normally it's a very good connection. So, yeah. So you've got an international – you've got a national federal banking policy with the Federal Reserve, monetary contraction.

Throw gasoline on the fire by igniting a trade war. And what the trade war does, because it's so retaliatory, it basically helps to spread the depression worldwide. So it worsens conditions in basically all countries that partake in it. So you've got that one effect. The second effect, it has acute harms on specific export industries, both because they're price takers from the tariff and they're also...

operating on a now hostile world market where other countries are retaliating against them. And if your agriculture sector is your main export sector and that's getting just battered down by retaliatory tips abroad, you're in really bad shape.

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That's why you get an acute depression within a depression in the farm sector. So post-World War II, there is this shift towards free trade or the beginning of a shift towards free trade. How much is this –

Guided by the economists and intellectuals who understand this phenomena, or is it just, again, a kind of political response? It's a little bit of both. I mean, if we say that Cordell Hall is the architect of it, Hall was a very adept politician, but he also understood free trade. Mm-hmm.

He's someone that you go back to some of his congressional speeches in the early 1900s, and he's quoting Frank William Taussig, William Graham Sumner, even Adam Smith, David Ricardo. He's very aware of free trade economics and the theory behind what he was arguing. So it's a surprisingly literate moment in our political history that I think we've lost. And then at the same time, you have a... Lost Phil again.

Let's see. Hopefully it'll be short. Yeah, those ISPs in Virginia. I don't know. It seems like Puerto Rico is more stable. Yeah, yeah. I've never had this on this computer. It's...

Okay, I think it's back. Yeah, you're back. So you have the Bretton Woods Conference that takes place in 1944, and although we remember it for international exchange rate systems and all the issues with that, one of the things that spawns is a subsequent agreement, the GATT agreement in 1947. And in a way, this is, weirdly, John Maynard Keynes is one of the major influences on this.

And he's recognizing some of the failures of trade during the Great Depression. And it's like, how do we put it on a more stable global footing? And he steers toward this type of an agreement. So there are certainly economists that are in the discussion there that are making those arguments when the GATT emerges in 1947. And what's the effect? So we start in 1947 and we take it out until, let's say, 2016. How did...

What happens to tariffs around the world?

It's a precipitous decline. It's the most sustained period of trade liberalization in human history. And it starts with the original signers of the GATT. Basically, they adopt terms very similar to what Hall had adopted in the United States in 1934. Even some of the language is carried over. And it's to provide a platform for countries to come together and offer reciprocal reductions in their barriers to trade.

And this takes place over several successive rounds, uh, through the 1950s and sixties. But he, the aim of each is to lower barriers, uh, piecemeal. Uh, but the trajectory is all downward and it goes, you can see it in like the average tariff rate of the world and of most major economies. Uh, you know, they, they emerged from the world war two era with a medium to high tariff. Some, some are still holdovers from the smooth Holly trade war. Uh,

Then by the 1990s, early 2000s, you start getting in the territory where the average tariff rate of a typical country is 5% or less. It's very, very small. You continue that all the way up to the present day, and it turns out most developed countries have average tariff rates between 0% and 3%. So very, very small piecemeal tariffs. There are a few exceptions. There's always crony interest rates.

that wants dairy or sugar or something protected. But by and large, very, very free trade up until the 2010s.

And to what extent, you know, when does China integrate into all of this system? They start joining into the discussions of free trade in the late 1990s and then early 2000s. They enter in as a member of the WTO. And there's all this talk about the fact that, oh, China has high tariffs. How much truth is there to that?

Well, you can go on the World Bank's website. They have the comparative tariff rates between countries. And you can go on things like Economic Freedom of the World or the Heritage Foundation has its own similar index where they rank countries by how liberalized they are. China is only a few steps behind the United States in most of those rankings.

It turns out now we're on the lower end of developed economies, and that's the other crazy thing. The European Union, Great Britain, Canada, Australia, all of these major trading partners actually had lower tariff rates

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Prior to this current Trump trade war than the United States imposed upon others. And China is just a little bit behind us, but it certainly moved them as well in the free trade direction. Is there, you know, short of Peter Navarro, is there any kind of intellectual justification for tariffs? Are there economists who actually believe tariffs are good?

Very, very few. I mean, there are people – so Paul Krugman, who is, to his credit, is generally a free trader. He has discovered some theoretical scenarios where a tariff might be used in a leveraged way that improves the welfare of the society that imposes it. But then he comes and puts a caveat and says, but if you try to get that through the political system that we have, it's going to be captured by the interest groups. Yep.

So it's better to not even try is essentially the message there. But these are all theoretical curiosities. Now, there's some parts of the foreign policy world that would argue tariffs are like a sanction tool, although I'd counter that their sanctions in general are generally – they're very ineffective in what they do.

And a tariff is no different than that because a lot of the incidents, the harm, is actually imposed on your own economy, not the country abroad. Is there any examples in history of tariffs being used as a foreign policy tool that were effective? Not really all that well.

Thomas Jefferson tried with the Embargo Act. This is all in the lead up to the War of 1812 against the European powers and Britain in particular. You know, they were doing some things, predation on the seas, impressing sailors, general hostility. And he thought, okay, well, we're going to put an embargo in place as like a punitive sanction. And

And what they discovered pretty quickly is that the cost of that is actually borne mostly by the domestic economy. And that's an embargo, not even tariffs, right? Right, right. Yeah, it's just we're going to try to sanction. I mean, it's, you know, the old analogy is like we put up blockades on our enemy's ports during war. This is like putting a blockade up on our own ports. So, you know, so in the 2010s,

What starts changing to change Americans' attitudes towards tariffs? So I guess a couple things. You have an ascendancy on the political left of a very aggressive, almost socialistic branch of the Democratic Party that was not there during the Clinton era or that was marginalized in the Clinton era. Because Clinton, for all of his other interventions, he's generally a free trade guy with a few exceptions.

George W. Bush, with all of his problems, is generally a free trade guy with a few exceptions. Like he got lobbied by the steel industry and he was wanting to win the Rust Belt states when he was up for re-election. So he threw him a vote. Even Reagan caved to the lobby. Exactly. But these are all the exceptions rather than the rule. Then in the early 2010s, you start getting this Bernie Sanders wing of the Democratic Party that emerges. Yeah.

And it takes kind of like the old Dick Gephardt message and puts it on steroids. Elizabeth Warren, another example. These really, really far left, they're socialists, but they're like protectionist socialists. They want, at the end of the day, they're just central planners. They want to plan the entire American economy, and trade is one component of that. And they're like, oh, well, we also need to benefit the domestic industry. So that emerges on the left. It kind of unmoors the

Democratic Party center from its previous commitment to free trade that emerged under Bill Clinton and this is when you start getting like these crazy anti-WTO protests in the early 2000s mid 2000s those are a symptom of it as well and they're basically like communists running around with masks on and smashing street windows on the streets in Seattle we all remember riots and stuff it's the same type of a thing

So that faction emerges as the protectionist left, and then almost a reaction to that, you start getting the populist right. And this is, it's a little bit later, it's kind of a lagging movement behind it. The only antecedent that was really pronounced was the Pat Buchanan movement in the 1990s. But

But that had been a very small wing of the Republican Party. Buchanan was an old school, like 1920s style Republican protectionist that weirdly held over as this relic into the modern era. And some of his messaging got picked up by the Trump movement.

And then you started seeing other people on the populist right. You know, you see Senator Josh Hawley, Marco Rubio starts dabbling in this in the mid-2010s. These are more interventionist groups.

perspectives on economic policy than the Republican Party had been indulging up until that point. It's not just on tariffs that they do this margin. They also want industrial subsidies. Some of them also want to use reinvigorate antitrust subsidies

to break up companies they dislike. It's just the heavy hand of the state. It's just both right and left-wing versions of government central planning are very conducive to this tariff ideology. And then Trump, who had always been a protectionist going back to the 1970s and 80s, he emerges and he has a natural constituency in both of these groups and really kind of builds his presidency around that.

So one of the economic stories that seems to motivate these people quite a bit is, which I think started on the left, and I started noticing it starting with the financial crisis. And that is this idea that, what is it, wages are stagnated, the middle class is being hollowed out, middle class is shrinking, poverty is increasing, I guess, although they never quite say it. But wages, you know, life was better before.

Right.

How did it become – today it's like everybody believes it, right? Deeply believes it. It's really hard to challenge. It's like the inequality myth, the myth that the 1% are running away. And that's intertwined with it as well. It's the perception that there are titans of industry that are doing great and everyone else is just scraping by. I think part of it – so it's a misdiagnosis of things like the financial crisis, right?

That certainly, I mean, unfortunately, the message that was taken away, the financial crisis is basically a stacked succession of government blunders that caused that whole thing to happen. And it starts in the housing industry and it spreads elsewhere through just terrible regulatory incentives. And yet that story has been lost. Well, and mismanagement by the Federal Reserve, as always. Exactly. It's all the classic missteps that...

that government could do, they did, and you got a financial crisis out of it, and yet somehow they've escaped culpability for that and shifted the blame and said, oh, well, I mean, it's almost like this 1890s tariff narrative. Free trade must have caused that to happen. You look at the actual statistics...

American industrial output. You can go on the Federal Reserve St. Louis website right now, look at American industrial output. It accelerates after NAFTA. It accelerates through the 2010s. Yes, it does suffer the same effect of the financial crisis as everyone else, but it rebounds almost immediately. And it's in the mid-2010s, it kind of hits its peak. Now, COVID again knocks it back down, but we

We've recovered. There's no evidence that industry has been hollowed out. There has been a decline in the number of people employed in industry, but a lot of that comes from better technology. Instead of sitting there on the assembly line, you now have machines that are much more efficient to do that.

Uh, there's no unemployment crisis across the country. We've had relatively low unemployment except for things like COVID, uh, except for things like the financial crisis over the past 20 years, unemployment otherwise has been very low. Uh,

It's not like people are just scrambling to find a job and begging for the factory to come back and put them on an assembly line. And yet there's this myth, and the myth is often projected around other people. So you see all the voices in Washington that are touting this narrative of,

have never worked a day in their lives in a factory. I mean, imagine Howard Lutnick working in a factory. I mean, he doesn't even know to describe what happens on the floor of a factory. Oren Cass, who's this think tank advocate of tariffs and industrial policy and a big pusher of this narrative in D.C., is a Harvard-educated lawyer that comes from the bluest of the blue blood of New England and

probably has never stepped in a parking lot of a factory before and yet acts as if he's speaking on behalf of the beleaguered working class it's weirdly it's like a right wing vanguardism that's been asserted here we're the intellectuals we know that you're suffering and we're going to purport to speak on your behalf whether you want it or not and then they package that up in a mythology that appeals to voters for a variety of reasons

Well, and sadly, it does appeal to voters because both on the right and the left, we're seeing Bernie Sanders is still pretty popular. You'll see. And then, of course, on the right, Trump wins. What is it about this message? I mean, what have we done wrong that, you know, we fail to convince people of reality, of the facts of reality, the truth about their own condition? I mean, they are convinced that they are worse off, even though they're quite a bit better off.

Well, the other side is offering free candy and unicorns. We're offering economic freedom. We're giving you the opportunity to enjoy the fruits of the market, including the unseen fruits. I mean, the fact that consumer goods are more affordable now

than they've ever been in human history. And abundance is more widespread than it's ever been in human history. It's just taken for granted. But a politician comes along and says, ah, well, I'll give you favors and I'll make the government your friend. And it'll invest money in these things that you want. And you'll see returns. Just listen to me. It's always hard to argue against that as an electoral message. It's pretty depressing. So, yeah, so...

How surprised were you of how aggressive Trump has been with regards to tariffs?

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So it's been alarming. I've got to say, my most optimistic thoughts

The scenario that I thought was going to happen when he won is that we would get a repeat of his first term where he does engage in some pretty aggressive tariffs, but they're targeted against China. They're targeted in specific sectors. And Biden continued those policies. So I thought, okay, they're not great policies, but it'll be a continuation of the status quo. Then I start seeing some of the appointments he's rolling out in November and December of last year.

You see Howard Letnick, who's this like arch protectionist billionaire that has put himself again as one of these other vanguard types of the working class. It's just really bizarre. Peter Navarro, who I frankly think is crazy. I knew Peter Navarro before 2016. I lived in Orange County and he taught at the University of California, Irvine.

And I used to say even back then, you know, Peter Navarro found a shtick. He was the only economist who was against trade in the world. So Fox or any other network wanted somebody who was against trade. They called Peter Navarro. So he was always in the studio. He was always taping stuff. I'd bump into him in recording studios. Yeah. But he was just an opportunist who figured out this little niche. And then I remember 2016 when Trump or 2017 when Trump appoints him, it's like,

Really? That guy. Yeah, exactly. Exactly. Yeah. And there's the real problem with this White House is he surrounded himself in an echo chamber of tariff protectionists, but they might be the only tariff protectionists in the econ profession. Yep.

J.D. Vance is certainly a big, I mean, he was another one of those members of the Senate. It's like Josh Hawley on steroids. Vance has this cultural narrative that the Midwest has been hollowed out by free trade and government needs to step in and correct it. He also thinks that he's got some weird anti-capitalistic moral beliefs.

that are tied to some very extreme religious beliefs that he shares. You get some of the Eastern European post-liberalism movement. He's ideologically ingrained in that sort of stuff. And, you know, they make capitalism the scapegoat of their entire worldview. Yeah, for him, it's very philosophical, I think. I agree with you. Absolutely. He's a real nationalist and he's an integral, you know, he's influenced by Deneen and these guys.

Exactly. They all think capitalism is like icky. It's immoral. It's dirty. It's materialistic. Modification. It taints the soul. It's a theological argument at its basis. And it's also proffered by people who are frankly incompetent when it comes to understanding economic ideas. They have no exposure to it. So they just make it up as they go. Yeah.

I mean that in all seriousness. Ask one of them to explain the theory of comparative advantage. They bumble around, get their words twisted. We even saw it this week. Ask them to explain how gross domestic product is calculated, and they have these weird ideas that the accounting offsets for trade to make it not gross national product but gross domestic product are like this operational mechanism that can be corrected with tariffs. It's just nuts.

So, yes. Amateur. Imports actually reduce gross domestic product. That's the claim. That's the claim. And it's just strictly an accounting adjustment. Macro econ 101, this is the thing you cover on the second day of class, but they've never had that class and have rationalized their way to it because it seems to support the policy objective that they want. Yeah.

It's stunningly, stunningly absurd. So, yeah, he's surrounding himself by the few people who reject trade. And really, there's nobody there that will stand up to him. What do you think of somebody who's asking Ian's question?

How much you know about Stephen Miron and his paper? Oh, boy. He used this guy to be structuring the global trading system. And what do you think of him? What's his background? Where did he come from? Yeah. See, he actually comes out of a mainstream econ program. He's a Harvard PhD in econ. Studies under Marty Feldstein, who's the Council of Economic Advisors guy under Reagan. He was generally a free market guy. So he

He didn't really have much of an academic profile prior to this. I think I first noticed him, he started bouncing around some of these ideas toward the end of the last Trump administration. He had been involved as like a treasury official.

So Stephen Myron, this paper he put out, this was one of the moments actually in, I think it was November or December, Trump announced him as the CEA chair. And first I'm like, wait, that guy? And then second, I start reading some of his papers and I'm like, oh, this is nuts. So what Myron did is he wrote this article and it's referred to as the Mar-a-Lago Accord paper.

He borrowed that name from, I think, some other economist that floated it. But he has this idea that the dollar is overvalued worldwide, and that is the mechanism that's the cause of our trade deficits. Now, he doesn't really explain or get into depth on why trade deficits are undesirable other than Trump has said so. And I don't think Trump understands what a trade deficit is, frankly. I'm not sure he understands what a trade is. No.

Yeah, exactly. But deficits sound bad, and they poll very bad. You know, I make this joke. You ask pollsters, if they went around and asked the average American, should the United States maintain a capital account surplus, 75% would say yes. Yep, absolutely. And the capital account surplus is the other side of the trade deficit. These policies...

So it's that level of superficiality. But Myron thinks that trade deficits are bad. He also has some weird theories about how tariffs could replace income taxes as a revenue source. And then on top of this, he has this, you know, frankly, kind of bonkers theory that

that the position of the dollar in the world, the strong position of the dollar in the world is kind of like this global public goods curse on the United States that requires us to bear the burdens of all of these other things, both economically and then it filters into like military spending. And again, it's like if your only tool is a tariff, everything looks like an industry to be protected.

But he's got this idea here, but he's got a problem, a theoretical problem. Because if you impose tariffs against the world...

that strengthens the position of the dollar vis-a-vis foreign currency units, which is the absolute opposite direction of what he wants to go. Well, as long as phone is wanting to invest in the U S exactly. When they stop wanting to invest in the U S that doesn't work in the U S then, well, then you start getting other problems. Uh, but, but,

But if you have a caterous parabus, you'd have a dollar strengthening effect from a tariff. He says, well, this is a problem. We need to offset this through basically coaxing other countries into a currency revaluation on favorable terms to the U.S. Wow. And how do you do that?

Well, this is the really bonkers part of the paper. He says, well, you start using tariffs as like this bludgeon. It's the stick and the carrot and stick approach. As we impose tariffs and bully people into accepting a preferential currency arrangement with the U.S. or maybe some of the more extreme versions of things that he's floated is you exchange short-term treasury bills for long-term century bonds is one of the things that he calls them at the

at rates that are more favorable to the United States. And you force people to buy them. Force people to buy them. It's like if you don't buy them, we're going to offer you a deal you can't refuse, and that deal is either you buy them or you're going to get a tariff slapped on you. This was the idea that's floated in this paper, and you see elements have crept up in the White House of that paper recently.

being advanced, although they retreated from it because it sent the international currency markets and bond markets haywire a couple weeks ago. So they kind of said, maybe we need to back away. But Myron gave a speech right after the Liberation Day tariff announcement, and it's on the White House's website. And the speech is basically like a bullet-pointed version of this paper he published last year.

So I call these, they're the rebalancer faction of the protectionists in the White House.

Uh, and this is the other thing to understand about this current white house. Trump is surrounded by protectionists, but they're protectionists for about five or six different reasons. Uh, you have the classical, uh, Peter Navarro, just like cranky 19th century economics. We need to bolster industry. You have Letnick who, who thinks keep floating this idea that we're going to replace the IRS. Uh, you have JD Vance who has like this cultural protectionism, uh,

You have the China hawks that want to leverage it in diplomatic – for diplomatic leverage abroad to try to attain certain policy objectives in the foreign arena. Then you have these currency rebalancer people, which is where the faction that Myron comes from, although J.D. Vance is also apparently sympathetic to this. I'm sure.

There was a, about two years ago, he was on a committee hearing with Jerome Powell. And I keep pointing people to look up this speech that he gives in front of Jerome Powell. And it is off the walls nuts. It's about how the dollar is America's curse. And it means that the rest of the world is taking advantage of us. And we need to weaken the dollar intentionally. Yeah.

Just off-the-wall stuff. Who on earth is advising this guy on his economic ideas? It reads like the Lyndon LaRouche blog in 1985. I remember in 1987, the Treasury Secretary of the United States went on the weekend and said we were going to weaken the dollar and we got Black Monday as a consequence. The stock market went down 25 percent in one day.

People forget these things. It is playing with fire. And that's why we saw the bond markets get spooked a couple weeks ago and why we start to see the dollar – I mean, confidence in the dollar has fallen as a result of even floating these ideas. Now, I think, fortunately, some cooler heads have prevailed and they backed off of that one. But it's this seesaw where, like, one week the –

Old school neo-Markintolist protectionists have Trump's ear and he's going crazy haywire on all these extreme punitive protective raids. The other week, it's like, oh, no, let's leverage tariffs against China. Another week, it's the rebalancers have his ear.

And that's why you get this vacillation between extremely high tariffs that are enacted, and then two days later they're paused, and then three days after that another version's enacted. So it's just created this crazy uncertainty as all these tariff factions are fighting for his attention. How much do you get a sense that, and I know this is pure speculation, how many of these people believe in this stuff or is this...

Yeah. A power grab, you know, trying to suck up to Trump because he hates deficits and trade. He hates deficits and trade. And that's it's just an emotional thing. And he's not going to give it up. And they are just trying to rationalize it and give him the appearance of an intellectual excuse for it all. So there is definitely that faction in the White House. And I think these are some of the more the level or heads on it. So, you know, Kevin Hassett is chair of National Economic Council.

he doesn't believe in toes, be a free market guy. And I think he's, he's kind of sold himself this line. Well, uh, yes, we're, we're just doing this for strategic leverage reasons. And, uh, I mean, he's even gone to the media and said, but, but the goal is, uh, we can get other countries to lower their barriers against us and we'll get free trade in the end. Uh, I think that's a pipe dream. Uh, and I, and I absolutely believe that Kevin Hassett knows better than the policies he's advocating. Uh,

At the same time, I would rather have him have the presidency here than Stephen Myron or Howard Letnick or J.D. Vance, who are pushing these much more radical pro-tariff agendas. And you think they believe them?

Because I actually do think that Navarro is an ideologue on this. Letnick, I think, doesn't understand what trade is, but he absolutely believes this. J.D. Vance has an even more superficial understanding of trade, but has almost like this theological attachment to capitalism is icky and we need to do things to purify it and bring industry home.

And you see that in his speeches. I mean, it's a very moralizing crusade against capitalism from the right. I mean, some of these things, they sound like right-wing Marxists in a weird way. They do. I mean, they talk about exploitation. They talk about the same kind of

You know, the same kind of stuff. And they're trying to appeal to the same type of people that the Marxists tried to appeal to. And they're the vanguard. And again, you know, J.D. Vance, although he brags that he's from the humble upbringing in the Midwest. But, I mean, here's a guy that's the elite of the elite, Harvard educated or Yale educated lawyer.

ends up going into venture capital, best-selling author. He's very far away from those Midwestern roots that he seems to be building on. But again, it's like this right-wing vanguardism of purporting to speak on behalf of the workers. And there's the other interesting twist, because even though this appeals at the polls when you're offering favors to people, tariffs themselves are facing a huge backlash. Yeah.

J.D. Vance may be the most unpopular major politician in America today. He trails behind Trump. He trails behind basically the entire White House. Same with the poll questions on what's the approval rating for the Trump tariff policy. It's trailing by double digits. You ask average Americans, do you think tariffs will help or hurt you?

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It's quite surprising. These are atrocious poll numbers. It's quite surprising that they're making people get it, I have to say. Yeah, yeah. Well, they're seeing prices are going up at the stores. I mean, at the end of the day, these are a tax increase, and you can't hide a tax increase. Yeah.

So how do you think this – I mean, do you have any sense of how this plays out? Is he – are they going to stick to this? You know, we've got the 90-day and then something happens after 90 days. And, you know, he keeps saying, you know, I'm going to allow it to have some China, but he hasn't done it yet. And there's supposed to be a deal with China, which never – the Chinese don't seem in a hurry to actually sign. Yeah.

So I think there are enough ideologues in the White House that are going to keep it going for far longer than it should. And plus, Trump, his own natural inclination is toward tariffs. But Trump is also a fairly savvy politician. I'll give him that credit. He's also known for pivoting.

doing a complete 180 on an issue and pretending as if nothing had ever changed. Declaring victory. Yeah, he manages to sell that message. And then the other thing about Trump, he has a long history of throwing people under the bus and blaming them for mistakes of his administration, up to and including senior cabinet officials, senators,

previous vice presidents. So I think no one is immune from this. And if Trump sees that his presidency is being jeopardized by an imminent recession, I think there is a chance he starts looking for an off-ramp. And part of that off-ramp will be backing down from some of the most extreme versions of the policy. The other part of the off-ramp will be picking a fall guy.

And throwing that person under the bus in a very public way, as Trump is prone to do. The other thing I could see happening, and this is what really alarms me as a constitutionalist, all of these tariffs have been enacted through emergency presidential decree. Yep.

Not a single vote in Congress. Go read the Constitution. The tariff power belongs to Congress, and revenue bills must originate in the House of Representatives. Under no conceivable interpretation of the Constitution that's actually grouted in his text is anything that he's doing right now legal or constitutional. And in fact, the statute he's invoking doesn't even mention the word tariff.

So now we have, fortunately, that there have been several lawsuits filed by people that have been affected by tariffs challenging the constitutionality of this. And if originalism is indeed as strong as we've been led to believe it is in the Supreme Court, I don't see the court...

buying a lot of the administration's arguments for this expansive unilateral tariff power. So, you know, I'm cautiously optimistic that we may get a court ruling knocking off all of this nonsense and just declaring it unconstitutional. That'd be amazing. It could take a few months, I guess, maybe till the fall to get actually to the Supreme Court. We've got, I think the first hearing is in front of one of the courts is on May 12th or 13th. Right, right. Yeah. Yeah.

But, yes, that is a hope because it clearly should be. You know, just like today, I guess, a judge ruled that they can't use the Alien Enemies Act. Yeah, exactly. Against people who are not enemies because we're not at war. Exactly. Maybe they can – maybe they'll also –

It's like reclaiming constitutional powers here. I mean, if you think of it, the president couldn't just decree tomorrow that we have universal health care for all. Although Joe Biden and Barack Obama probably wanted to do that, but even they wouldn't go that far. So why can Trump declare, I'm going to just rewrite the entire tariff schedule of the United States on a personal whim?

without any legislative oversight. It's frankly offensive to a system of rule of law. Absolutely. That type of a policy could even be countenanced. So do you think we're going to get any deals?

I'm very skeptical. I know the White House is claiming that they're getting deals out of this, but it's kind of like, oh, well, 80 countries have come to us, and can you name the countries? They won't name them. That tells me they don't have a deal. And the Japanese went home, I understand. Exactly. And I think this has been one of the strategic missteps. It was such a haphazard rollout of this policy. So maybe back in late January, early February, Trump could have tried a...

carefully tailored. I mean, I disagree with the method, but at least there were some conceivable cases as I'm trying to get leverage to get the EU to maybe lower its agriculture tariffs or something like that. But he has blown his political capital.

by all this vacillation, basically other countries do not trust us anymore because it's been this seesaw back and forth. And I don't think he has the discipline to actually carry through on a deal of this type when the trust has already expired. So that ship has long sailed, and it's going to be very, very hard to recover and even get back to the position he was in in January and February. Yeah.

So what do you think this does? So we'll get to the U.S. in a minute, but what do you think, how bad is this for China? Trade wars are never good for either part. Lose-lose. Yeah, it's a lose-lose. It's a race to the bottom. So certainly they do feel some of the effects of that, although the incidence of the tax itself tends to fall on domestic consumers.

So we feel a very pronounced effect of it. One of the things that I am somewhat concerned about in the China situation, China will definitely spin this, propagandize it as if they're the victims of this war that the United States initiated against them without provocation or cause.

Now, you could argue that on other margins, China has been a bad actor. They even engage in currency manipulation. They've been a bad actor in that domain as well. As I always say, as if we don't, right? Right. As if we don't manipulate our currency. That's what the Fed does when they meet and determine interest rates. That's exactly it. I mean, this is why the answer to Steve Myron's papers, all this is not to –

into currency deals is to depoliticize the central bank, get it out of the currency manipulation business. Yes. Maybe even abolishing it. Abolishing it would be good, yes. But that's a little radical. It's going the other direction. But China now, because they can play themselves as the victim, they're

it's created leverage that they did not have prior to this trade war starting for them because they can reach out to other countries as well. And this is the sheer stupidity of the Trump tactic. If he had a narrow targeted policy against China, why are you putting tariffs on Canada and Mexico? Peaceful trading partners that were geopolitically aligned with us for the most part and also the

had geopolitical concerns about China. This is like sending other countries running into China's arms because you've just needlessly provoked and... And even worse, it's Taiwan, Japan, and South Korea. Yeah.

Right, right. Other countries that were in a somewhat adversarial position toward China now have a reason to deal with China because the United States has declared a trade war on them for no good reason, no apparent reason.

And that's, again, it's like back to the race to the bottom. It's just a very bad strategy for achieving anything that Trump claims he wants. And he's getting a lot of really bad advice if he thinks that this is going to yield the results that he expects. And it seems that it's just going to increase nationalism in China, which is a dangerous force long term. Yeah.

Yeah, it's the old saying, sometimes attributed to Bastiat, that when good cease to cross borders, armies do. I mean, peaceful trade relations are one of the mechanisms that reinforces global safety and security. And when they fall apart, suddenly military options become a much more viable tool because there's no longer a market that you can risk losing. Now, what do you think about...

The arguments about national security and the need to be able to produce in the United States some of the things that today we rely almost totally on China. So I think there are other policies that could be adopted to incentivize this. So obviously I don't want to outsource our nuclear weapon technology to China. And there are some things like sensitive microchips, sensitive computing parts, etc.

certain very, very narrow technological tools and items, I think, certainly fall under a security-based case. But this comes into, you know, there are other ways to do this besides building giant tariff walls. Why not reform government procurement policies? Yep.

why not, uh, put certain types of classification on certain types of technology, uh, to where, where, uh, the, the way that it's produced the contract to produce a military good, uh, can specific specifically come from the United States. Now this is open to cronyism, uh, because it moves from, uh, uh, the advanced supercomputer chip, uh,

is a sensitive military technology. And then in a few months later, it's like whoever's making the canteens and lunch boxes for the army are also sensitive military technology. Uh, so, so there is a risk there and that, that cronyism needs to be guarded against as well. Uh, but again, that's an easier problem to solve than massive tariffs. Uh, so it's just the wrong instrument for those goals is basically what it comes down to at the end of the day. Uh, and then the other thing you can do, uh,

A diversified stream of essential resources is better than a unitary stream. It's actually good that we get energy. We're engaged in an energy trade with Canada. It's good that we're engaged in a steel and aluminum trade with Canada and Mexico. These are friendly neighbors, and it means that there are multiple sources from a good that we also do produce quite a bit of domestically. Yep.

If you were to get into a war, I would hope that our neighbors would be on the same side during that war, and I would hope that those exchanges would continue to occur across borders. Absolutely. I'd rather that be the case than to get into a war where we've angered and isolated ourselves from the entire world under this crazy quest to just produce everything internally. Right.

Yeah, it's insane. So what do you think the impact is going to be on the U.S. economy? So we just got a negative GDP number. It's very small and probably be revised. But what do you expect? This quarter is going to be the quarter where we start seeing the impact of the tariff, the second quarter. What do you expect the numbers to come in for the rest of the year? Well, that's, yeah, this is the great uncertainty. So we know from the stock markets, markets abhor uncertainty. Mm-hmm.

Bad policies, they're absorbed and they do take a hit from bad policies as well. If you tax something, it's not going to be good for the market. But if the tax is an on-again, off-again light switch...

What that just means is people sit on their money or they delay decisions until they know the outcome. And that's the real risk we're running into with these tariff policies. You can look at the stock market down to the day that every time Trump announced a tariff between January and now, the stock market plummets immediately. And then he backs off and it rebounds. It plummets, then it rebounds. This is an acute, self-inflicted harm.

Does that eventually start translating into broader economic output? Does it translate into consumption patterns? It absolutely will if you are starting to delay decisions at companies on what to produce and how much to produce and what their outlook is on the future. You know, statistics that I see underappreciated in this discussion is most domestic produced goods are

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Have some sort of an input, whether it's raw material or a part that comes from abroad. So you can have a factory in Ohio or South Carolina or Tennessee that's an American factory making American goods, but they're getting parts from Mexico. They're getting chips from Taiwan. They're getting aluminum from Canada. And tariffs are going to affect their own costs, right?

including what they can anticipate producing six months from now or a year from now. It's almost like a self-imposed COVID lockdown style effect on supply chains. And that's where you start getting some real problems. Those repercussions occur, you know, there are a couple of weeks to a couple of months after the initial shock.

So I think this is on the – it's approaching on the horizon. We're going to start seeing some of the effects of the tariffs that are already in place on disrupting supply chains or causing raw material inputs from abroad to go up, and that alters the production decisions of a U.S.-based company that can no longer afford to produce as many units of whatever it makes than it would have under the previous input prices. And does that create unemployment? Absolutely will.

I think there have been some hiring pauses at U.S.-based auto manufacturers because they're afraid they can't get parts. They're delaying production decisions. So we're already starting to see kind of the soft unemployment effects. And if this goes into a full-fledged trade war with major supply chain disruptions, unemployment becomes an acute problem. So it's like even though this populist message is tailored toward labor...

Labor is not necessarily a beneficiary of tariffs. It's often in a very ambiguous position, both on the effects of what that does for production and their jobs, and also spending habits. If a worker in a steel mill is now faced with double the budget cost of just household items, clothing, food, and goods that they get at their Walmart, it might be

a situation that puts them economically worse off than any gain that their protected industry gets from the tariff. Yeah, absolutely. And then do you expect to see empty shelves in a few weeks? So I think we'll start to see some very early signs of them.

I don't think it's going to be like the COVID, suddenly everything's under lockdown and you can't ship anything anywhere and everyone runs and grabs all the toilet paper. But I think you start to see bits and pieces around the edges of

of the economy start to become more expensive or are no longer stocked at a ready supply. And it turns out it's because they were on a ship coming from China that the order was canceled a month ago because of the tariff cost. And it takes a month to transit the Panama Canal and get it over to the United States. And we just now are starting to incur...

some of the effects of that. So yeah, there's a lag of the policies that are already in place. There is a lag of effect. And if, uh, if Trump after his 90 day pause, resume some of the insanity, um, even if he partially resumes it, that only exacerbates the lag. And, and this 10% flat tariff, you know, if he doesn't resume the craziness, but just keeps the 10%, how bad is that? It's one of the largest peacetime tax hikes that we've ever had in the 20th or 21st centuries. Yeah.

You know, I put this before Trump took office, the average U.S. tariff rate had been hovering around 1% to 3% overall in all goods. And if we're jacking that up overnight to 10%, this moves us from the lower end of the developed world. It moves us from just a little bit behind the EU and Great Britain and Canada to now we're in the same territory of average tariff rate applied by Zimbabwe or China.

or Venezuela or some of these just economic basket cases of the, of the 20th and 20th and 21st century. I mean, this is a third world dictatorship style, um, fiscal policy. Uh, and there's certainly no other developed economy on earth that has tariffs that high. If it's a uniform 10%, you know, it also illustrates the ratchet effect of this. Uh,

Trump goes extreme and then walks it back to something lower, but still it's higher than we previously had. Yeah, he's talking about lowering the Chinese tariff from $145 to $60. Yeah. $60 is still massive. Yeah, still massive because $145 to $60, well, three months ago, we had barely any tariff at all. Yeah.

And we've still got them now. It's just a massive tax hike. It's like, I'm going to raise your income tax rate to 90%. And then as a gift to you, lower it to 60%. I'm still much worse off. And I don't think anyone would stand for that if that was income tax policy. So why should we stand for it if it's tariff policy? Absolutely. Let's see. Shazbut asks, if you had a time machine, what historical economic data would you want to uncover? Yeah.

Wow. Wow. Yeah. If I could go back to the early founding years of the Republic, because unfortunately we didn't keep records on trade. Yep. And that area has to be reconstructed and inferred from shipping records and things like that.

I would want to know what's the equivalent of the trade barrier that existed on the United States at its founding when we declared independence. Because one of the reasons we declared independence is Britain had imposed these navigation acts and all these other taxes and restrictions on our trade and commerce. For a brief time, they even shut down the entire port of Boston.

It's like an extreme mercantile protectionist retaliatory measures, and that's what drove us to independence. I would like to know the data that underlie some of those policies and how that shaped the early republic's thinking on free trade because there is an ethos of free trade that's adhered to by almost every major figure of that era except for Alexander Hamilton. Yeah.

So he was not a free trader? He was definitely not a free trader. Okay. But he's not a high tariff guy in the Henry Clay sense. So he's more protectionist than most of his peers, but he's not like adopt these obscene 60 or 145% tariff rates. He would think that's crazy because he wants federal revenue to come in, and if you raise the tariff rate that high, it becomes punitive and it actually eats away at revenue.

Jennifer asks, have you heard of some people confusing the federal deficit with the trade deficit? I've seen signs the president of the United States makes that confusion from time to time.

You see that in this rhetoric, him and Vance in particular. They talk about other countries are ripping us off. And they'll say we're $36 trillion in debt and it's because Canada has been ripping us off. And it's like there's no connection here in the way that they're asserting it. They just hear the term deficit and assume that there's some sort of interrelationship.

What it gets back down to is just the...

abject economic ignorance that seems to be percolating around this White House that they just confuse basic terms it's the same people that are mistaking the GDP formula it's the same people that have these Peter Navarro style theories of what tariffs can do it's innumeracy overlaid with economic illiteracy and I know I sound harsh on this but I have very little patience for that

because it's like an economic luddism that they've embraced. What do you think of the argument, I think Peter Schiff makes this, that the trade deficit's bad because it's a reflection of the fact that we are borrowing money, we're living on borrowed money. That is, we don't actually create a lot of value. We borrow money from the rest of the world and we spend it on inputs. Yeah, so certainly there are

There are treasury bills that are held by foreign governments. That's absolutely the case. I'd say the international monetary system is less than ideal.

and basically has been ever since the world went off the gold standard. Yep. And that opens opportunities for some bad behavior in there. I don't think it's as big of a problem as an alarmist would say on that. So Peter Schiff has actually been pretty critical of the Trump administration. Yes, he has. Very, very critical.

So I think he's aware that, yes, this is a component of a larger debt problem that the U.S. government has. But at the end of the day, this is a spending problem. Yes, absolutely. Foreign countries hold a portion of our debt because we spend too much. It's not foreign countries hold a portion of our debt because we trade too much. That's nonsensical. And he wouldn't say that. Exactly. It's a symptom, not a cause. But it's –

And it is so true that there's a reason why foreigners hold out debt is because they still think it's one of the best assets to hold in the world. So as much debt as we've taken on, they still think we're good for it. Maybe they're wrong. Right, right. And that's where you get some of these crazy schemes about like trying to coax people into exchanging treasuries for bonds on worse terms. It's kind of like this actually destabilizes the dollar system.

You know, we started to see, I think, some signs of that effect a couple weeks ago. And I don't know what went on in some of those closed rooms, but it certainly spooked the markets. Well, definitely. I know a lot of investors and there was a lot of people panicking, you know, because everything was moving fast.

in ways that we've been taught in finance shouldn't be moving. It shouldn't happen. Interest rates going up and the dollar going down does not consistently, it's not supposed to happen. It's back to, yeah, they're playing with fire. It's a good burn. Yeah.

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If the Fed is abolished, don't we run the risk of the Treasury Department directly manipulating the currency? Well, that's why we have to, I think, be very, very careful what we do. If we abolish the central bank, handing it over to the Treasury Department is the absolute worst option. Politicizes it first. That just brings what little independence the central bank currently has in-house, and it's the whims of politics. This is Peronist Argentina-style governance.

This is why I think you need something like a gold standard, whether it's a direct exchange. I mean, there are other ways, mechanisms you can have a partial tie to a commodity that could be implemented. There are other ways that you can also insulate through rule mechanisms the central bank and take away its power. Right.

I think the central bank, the Federal Reserve, has crept into areas that were never intended or contemplated when it was created, or even as recently as 15 or 20 years ago. I mean, why is the Federal Reserve researching climate change policy? Why did the Biden-era Federal Reserve appointments get into DEI initiatives? Even...

Well, even bank regulations. It certainly wasn't when it was established supposed to be a bank regulator. Yeah, yeah. A lender of last resort, bank regulator, whatever.

and then, then it was added to a price stability mandate was added in there. Uh, and it was like the one thing that, that it's actually been horrible at is price stability. Uh, but that should be its core mandate. And I think it's because there were other political objectives that have been put in place there. I mean, the classical gold standard, the strongest argument for it was always that gold is, is hard to politically manipulate. I mean,

And it's a fixed material. It comes out of the ground. It's rare. You know, you have to put in the work to pull it out of the ground. And yes, gold prices change, but it removes it several steps from the fingers of politicians unless they start legislatively fixing exchanges of other things to gold. Which they've done. And that's where currency manipulation occurs. Which they have a long history of doing. But yeah. Exactly. No, I think, Richard, when we talk about ending the Fed, I think most of us...

It doesn't mean moving it to another department of government. It means, in a sense, privatizing it through a private banking system and a gold standard. And then you don't need a Fed. You have private money.

and competition over that private money. And we had periods in the 19th century. They're not credits. Tariffs are the cause of prosperity in the 19th century, but not the relatively free banking system we had before the Civil War or not even the gold standard system we had after the Civil War. It's amazing. Michael asks, is there a greater than 50% chance these tariffs get repealed in full?

That, I don't think, I don't see that happening as long as Trump is president, unfortunately. I don't think we're going to get back to where we were in January 2025. We could de-escalate...

But the man likes tariffs, and if he does back away from them, he's going to call it a victory of some sort to get that lower level but still higher than it was tariff rate in place. And that might be his attempted off-ramp. It's like, well, okay, we'll get rid of the 60% tariffs and we'll back it down to 10%, or we'll get rid of the 10% tariffs and we'll back it down to 5%.

He's going to want to do that. I guess there's one other option, though, that could blow this all up, and that's the Supreme Court strikes it down. Yes, that's right. Which I think would be the ideal scenario. I'm hoping the court goes big and just says, no, Mr. President, you do not have this power. Everything you've just done under this is null and void. It would be pretty amazing. I mean, it would be fascinating to see what happens politically if they do that. I hope they do it.

MAGA will go nuts. They'll go nuts. But again, go back to the polling. Less than 30% of the population is on the board. It might save them. It might save them. Actually, it might save the Republicans' electoral chances in 2026. If they stay on this court, they're headed to a Smoot-Hawley-style defeat, I think. Yeah, the only thing in the Republicans' favor is the Democrats. Yes, exactly. Such a mess.

Michael asks, what do you think the chances are of a major recession next three to six months? Ooh. Uh, so all the prognosticators have dramatically raised the probability of a recession. So these are the major banks, uh, major financial houses that are, that do private prognostication. Uh, cause you know, back in January, it was seen as a, a, a slim existent, but very distant chance. Um,

we do have a much higher chance of a self-induced recession, especially if the GDP numbers from earlier this week hold up. We've already got one quarter of actual contraction. If we get another quarter or two of contraction, then that's when the panic button needs to be hit. All right. So what is the main argument against the idea that tariffs allow us to reshore manufacturing jobs?

Yeah, well, it's back to just how globally integrated our economy is. Again, if 60% of the things that are made in the United States use an imported raw material or component or part from abroad, reshoring that

It's basically a pipe dream. Because you're not reshoring at that point. You're trying to impose internal autarky, like a North Korea-style system of self-sufficiency. I think it's just rooted in a classical misunderstanding of what trade is and what trade does. U.S. businesses, by and large, are stronger than

Precisely because they have access to cheaper materials abroad. So anyone that thinks that we're going to reshore and make U.S. industry stronger, they're missing the whole part of the picture that U.S. industry attained its strength from the fact that it could exchange abroad. So Blaze asks, how many historians argue that the U.S. became a world superpower today?

Because of free federal education that started in the 19th century. Yeah. To what extent do you think that is true? I mean, I'm skeptical of that because it's so limited in the 19th century. So the Morrill Act passes, I think it's 1864, that establishes the land-grant colleges.

which are, you know, there's federal funding for certain types of universities, but universities are really an elite institution until after World War II. It's really the GI Bill and that whole area, and the Higher Education Act in the 1960s, that you start getting mass attendance at universities. It becomes an accessible thing, a university degree for the...

broad swaths of the public what about public education for i mean kids for for yeah yeah i mean but again we go back look at the 19th century you uh states that had public education some of them had like voucher like mechanisms um it's a very mixed history of uh you know essentially 50 different experiments playing out because so much of it's at the state or local level uh

I think the federal government did get involved in K-12 education very aggressively in the late 20th century, and it's just been a bureaucratic disaster. So you no longer have that experimentation of slightly different systems between the states that you did get in the 19th century and early 20th century. So if the Supreme Court strikes down these tariffs, do they strike down the...

The ones that... I forget the act that he uses. Yeah, so the IEEPA, it's one of the presidential emergency powers. So it wouldn't strike down, though, like the steel tariffs and the auto tariffs, or would it? Did he use that act for those as well? Yeah, yeah. This goes deep into Supreme Court history. In 1928 was the very first case on the delegation of the tariff power from Congress to the executive branch. Mm-hmm.

And the Supreme Court heard this case. It's a similar question. It's like, can Congress give up its power? And the Supreme Court rules, yes, they can, but there has to be a defined, intelligible principle of why they're doing so. In other words, they have to lay out guidelines for the bureaucrats. Yeah.

And what Congress did at the time and why those tariffs were sustained is they specified a regulatory procedure. Like the successors of that era of case law, there's something called a Section 301 tariff. You have all these clauses that are written elsewhere into the federal code that they allow if the conditions of dumping are met abroad, you can invoke X type of tariffs.

If there's a certain economic threat to a specific industry from abroad, you can adopt another set of tariffs. If there's a defined national security need, you can adopt another set of tariffs. And a lot of these things are deeply politicized. They're superficial regulatory requirements, but they're regulatory requirements nonetheless. And what it means is the president can't just on a random Tuesday decree them. The president can say, I'm going to invoke –

an anti-dumping clause tariff, what he does is he'll tell the U.S. Trade Representative or the Commerce Department, whoever the governing regulatory bodies happen to be, that they have to assemble a team of economists to investigate this, and it has to go through a regulatory review period, and it has to take testimony from the industries. So it's like a couple months of bureaucratic hurdles.

Now, they're normally rubber-stamped and just kind of shoved through, but those bureaucratic hurdles exist to meet the specific delegated principles of Congress. The IEPA tariffs don't have any of that. It's just the whim of the president. He's basically saying, I can do whatever I want and call it an emergency. And that's why I think it's constitutionally vulnerable in the way that some of these others are not. Good.

And in his first term, he didn't use the IEPA. He used these regulatory mechanisms. No, no, he used the more conventional clauses, and that's why the rollout was so much slower. They did have the regulatory review period, and it says, okay, well, you have to have like 30 days to collect comments, and you have to bring the economist in to issue a report. It's like going through the motions, but nonetheless, that is itself an obstacle. Mm-hmm.

And at least, unfortunately, I mean, I still think that Congress delegates too much of its powers, but at least it's a plausible case that they're following the letter on that or following Supreme Court precedent where there's no case at all that IEPA is constitutionally sanctioned or sound. Well, Phil, I know you have a hard stop.

And this has been great. I really appreciate this. Yeah, this has been fun. Absolutely, absolutely. Thank you. Thank you for giving the time. Thanks, you guys, for asking questions. And I will see you guys tomorrow. Phil, hopefully we'll meet up somewhere. Absolutely. Yep. Thanks a lot. See you soon. Take care. Bye. Have a good night.

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