The Economics of Tariffs and Trade (with Doug Irwin)

(upbeat music) Welcome to Econ Talk, Conversations for the Curious, part of the Library of Economics and Liberty. I'm your host, Russ Roberts of Shalem College in Jerusalem, and Stanford University's Hoover Institution. Go to econtalk.org where you can subscribe, comment on this episode and find links down there information related to today's conversation. You'll also find our archives, but every episode we've done going back to 2006. Our email address is mail at econtalk.org. We'd love to hear from you. (upbeat music) - Today is April 22nd, 2025, and my guest is economist and author, Doug Irwin, of Dartmouth College, where he is the John French Professor of Economics, our topic for today, tariffs, trade deficits, and this rather dramatic moment we're in the middle of, although by the time this airs, things, of course, could be radically different. So we're gonna stick to the basics. Hopefully to create a primer for listeners, clearing up some fundamental misunderstandings, some people are having, although I suspect at the end we'll touch on some of the details of this moment in particular. Doug last appeared on econtalk in October of 2010, discussing the Great Depression and the Gold Standard in episode I highly recommend. Doug, welcome back to econtalk. - Thanks for having me, good to be here. - Let's start with trade deficits. What's it mean when a country runs a trade deficit? What's the definition of a trade deficit? - Well, trade deficit is simply when a country imports more than an exports to the rest of the world. So that raises all sorts of questions, but that's the functional definition. Sometimes it's called a current account deficit 'cause it's a little bit broader than just merchandise. You have to include services, and then other things of that sort. - And so if the United States, I wanna talk about two examples that people are discussing a lot these days, the United States runs a trade deficit with respect to the rest of the world, the entire world. That is the United States imports more goods and services from the world than the world imports from the United States. And it also runs a trade deficit with many individual countries of different magnitudes that when aggregated at up to the whole entire trade deficit, what does it mean? Let's start with why a country might run a trade deficit vis-a-vis the rest of the entire world. - Yeah, there's various ways one can break it down. So one way to think about it sounds rather boring, but in terms of the balance of payment. So if we are importing more than we're exporting, we are sending more dollars abroad to at least pay for that, 'cause we're importing those goods. Those dollars don't stay abroad in general. They come back to the US instead of buying US goods, they're buying US assets. So that's one way to think about it, that actually we're exporting assets as well as goods. And that's sort of balancing what we're importing from the rest of the world. - Well, some of it is used to buy American goods and services, but not the whole, not all the dollars. So the dollars buy some American goods and services and in addition, buy American assets. And when you add in the asset position, you tend to get balanced. That's one little tricky thing there about currency. You wanna say anything about that? - Not really, 'cause I think that's a rather minor point of it, but you're absolutely right. So I think I have this book free trade under fire, and I try to update this calculation every now and then. For every dollar that we send abroad importing some foreign product, 75 cents comes back and buys US goods or service. And then 25 cents is buying US assets. So a dollar goes out, but a dollar comes back. It's just a question of how is it divided between buying goods and services from the US versus buying US assets? - And the currency part that we're gonna leave alone, 'cause a little bit of a red herring is a little complicated, because the US tends to be a reserve currency for the rest, for many nations in the world, meaning it's an easy way for countries around the world to hold a liquid form of purchasing power. - If I am correct, the US runs a surplus in services with respect to the rest, so is that correct? - That is absolutely correct, and it's been growing over time. It's pretty substantial, obviously, it doesn't make up for the deficit on merchandise goods, but the US is largely a service economy. We are a premier producer of many services, architectural services, contracting services, financial services, and so the rest of the world purchases those from the US. So we're a net exporter of services, yes. - And we're a net exporter of investment opportunities. So the United States runs a capital account surplus, but the capital account being a way of saying, the United States is a more attractive place for the world to invest that American investors find the rest of the world. So on net, the rest of the world is investing in the United States, world for what the United States is investing elsewhere. That's called a capital account surplus. That finances in some sense, but not literally the way, it's a bad phrase, because it's not the way you and I finance our purchases, but it is the counterpart, it's a better way to say it, of the deficit that the United States has in trade services, in goods and services, correct? - Absolutely, you said it very well, and I also agree with you on the financing aspect of it. The US is very different, because the dollar's sort of the world currency. People want to invest in the US. We have these safe assets, treasury notes. We have obviously a stock market that's doing very well. And so compared to other countries, we're just a rich, deep liquid capital market that is sort of a safe haven and a great opportunity to earn good returns for foreign investors. - Well, you said the stock market's doing very well, historically, on average. Well, this has been a bad month, recording this in April, and maybe we'll get into that later. But the United States is a very attractive place for investing. And so on one hand, the United States runs a capital account, surplus capital meaning investment. So again, just to make it clear, foreigners invest much more in the United States, the United States invests in foreign assets. And on the flip side, the United States imports more goods and services on the rest of the world than the rest of the world imports from the United States. Is there anything good or bad about either of those? Do they tell us anything about, let's just start with the health of the economy. - Yeah, not really. I mean, let me even vote, an author, a no-European of, and I am as well, Adam Smith, who said there's nothing more absurd than this doctrine of the balance of trade. Either as a measure of whether you're winning or losing from trade, or as something a source of concern. I also invoke the Wall Street Journal Editorial page, which once had this memorable phrase, the best way to think about the trade deficit is not to think about it. And sort of the way I've put it is, sometimes when I'm telling my students, let's say the government didn't produce statistics, economic statistics. If we had inflation, would you know it? Absolutely, you know it. Every time you go to the grocery store, someplace, you'd see it. If you, if we were in a recession, would you know it? Absolutely, you'd see people around you losing their jobs, maybe you yourself. If we were running a trade surplus or a deficit, would you know it? No, it's sort of an abstraction. It's not something that is personally effects you directly. So there are circumstances in which countries should perhaps worry about it, but I think for the US case with the dollar being reserve currency, it's generally not something that people have to fret about. I want to come back to that question about worrying about it, but I just want to make an historical point as you and I have both. We've been in these trenches so long fighting this battle that, you know, for a while, I just didn't write anything on Twitter and people were saying, don't you have anything to say about it? Yeah, about, I don't know, 100,000 words. I, 500,000, I don't know how much I've written about it. Look it up if you want. I'm happy to share it. And I kind of thought it was settled. I want to make a reference to, in 2006, when he comes to talk started, I had the privilege of interviewing Milton Friedman, I talked about how great it is that economics taught people that price controls are bad. And he said, oh, no, no, no, no, no. It wasn't economics. They got people to oppose price controls. And what he said, and he went on to say, the reason why you can go back and let's do it, we'll link to it. The reason people stop favoring price controls is because they live through it. And they got so horrified by it that they didn't want anymore. They didn't like the long lines for gasoline, for example. That was price controls on gasoline. And then he said, and when those people die, die off, people start thinking, maybe we should have price controls on things that get more expensive. So economics didn't solve this. So I kind of naively thought, no, you know, kind of so kindly educated the world about how tariffs work and trade deficits turns out it's more complicated than that. But I want to go back because having been in the trenches as long as I have, and you have, when you invoke Adam Smith, a lot of people say, well, Adam Smith or David Ricardo, they lived hundreds of years ago, their theories have been, they've been shown to be incorrect. And what they don't real, and they're old. That's an ancient doctrine. Those people don't realize is that Adam Smith wrote a significant piece of the wealth of nations to answer the people who were called mercantilists. And the mercantilists were worried about dollars leaving the country, in his case, England. And that doctrine, which was, I think, wrong, the mercantilist doctrine, I think the first reference I've seen is in like the 1200s. So if we're going to use an ad hominum, the equivalent of an ad hominum attack on a doctrine that's outdated, market delism is even older and more ancient than Smith's views on trade. - Yeah, I don't think Smith is out of date in really any significant way. I mean, maybe you find this the same way. Every time I pull blue book down for my shelf, the wealth of nations, I learn something again. I've read it, but I find there's some sentence I missed or insight. And it's just a true book of wisdom. I mean, here's a guy. He didn't have the internet. He, you know, limited to Britain in a little bit of time in France. But he knew so much and he interpreted things so well. And it's so relevant for today in so many dimensions. - I want to come back to a phrase you used a few minutes ago. You said, the dollars come back. So Americans buy goods from abroad, foreigners then have dollars. And they then spend them as you said on both goods and services and then on investment opportunities, assets, acquiring assets. And of course those assets, let's say all those assets puts money in the hands of Americans, it's a complicated thing to talk about. But a lot of people say, if we're running a trade deficit, obviously, we're giving foreigners more money than they're giving us. Now, we just made it clear that's not true. That's an arbitrary way of defining giving dollars 'cause it excludes investment opportunities. But I just want to pose the question. Suppose they didn't come back. Suppose foreigners gave us sold us cars and all kinds of things. And we sent them dollars. Americans sent them dollars. And the foreigners really liked the way the dollars looked. So they put them up on their walls, wallpaper, and never bought American goods and services or invest in American assets. Would that be bad for America? I mean, isn't that... We're stimulating their economy, but they're not stimulating ours. That's so unfair. - Well, in some sense, what we're doing is printing up worthless pieces of paper. They're giving us goods in exchange for them. And then there's no liability associated with that. They don't have to make a claim on our assets or our goods as a result of that. They'll just keep it down there. And in fact, actually, they're a lot of dollars circulating in the world, so that's true to some extent. In Latin American countries, they've got our Argentina dollars sort of circulate because they don't trust the domestic currency and elsewhere around the world. So there's a big stock of dollars out there in the world. But compared to the yearly flows, I think it's not huge. But once again, it's not necessarily a problem if they never redeem those dollars as a claim on US assets or goods or services. - But isn't it unfair? I mean, we're stimulating their economy. They're not stimulating ours. - Not unfair. They're helping us by selling their goods at reasonable prices to consumers that want to purchase them. So I'd still say it's a win-win. - Are we gonna have fewer jobs? - There's a book they should read, "The Choice" by you. This gets into a huge issue about manufacturing and things of that sort. So in terms of jobs, the current unemployment rate in the United States is about 4%. It's pretty low historically. That's also close to what we think is full employment. But we have a large trade deficit. In fact, if you look at the correlation between the unemployment rate and say imports as a share of GDP, they're negatively correlated. When the unemployment rate goes down, our imports to GDP go up 'cause we're buying more. We're robust, you know, the economy's doing well. And it's precisely when the unemployment rate goes up that we enter a recession that imports as a share of GDP go down. So imports aren't taking away from jobs in that sense. The correlation goes the wrong way for the imports are costing us jobs at the broad macroeconomical level. - And I think economics teaches that trade doesn't affect the number of jobs in the short run it can, of course. Trade disruptions are changes quickly. Quick changes in economic interactions with foreign countries can affect obviously employment in certain industries. But in general, trade, the way economists think about it, changes the kind of jobs we have, not the number of jobs. It doesn't mean the transitions are easy. There can be people in an industry who suddenly phase competition from foreigners, just like there can be tough transitions when there's innovation. And we don't need as many workers in a particular industry. We may come back and talk about that, but that's what's going on. It's an economic change that's on average good for the country, it makes it richer, but not every person. We don't want to pretend that's true. It's not true. And many people can face hardship from dislocations due to changes in the mix of trade, changes in technology and innovation. And so a country has to decide how they cushion or not those kinds of transitions. But as you point out, over the last 50, 75 years, the United States, except for recessions, are in generally have a very, very dynamic and healthy labor market and a rising standard of living. And at the same time, certain industries have been hurt very badly by trade, from competition from foreigners, others have responded and innovated to make their products more cheaply and higher quality. So it's a complicated picture, but this idea that somehow if foreigners don't spend money here, we'll have fewer jobs because those jobs won't be stimulating. The economy is to be a total misunderstanding of how what dollars are doing. That's not what they do. This idea that we need to keep the money in America or in your own country is a terrible, terrible fallacy. Well, we don't care about how many pieces of paper we have. We care about what it can buy. And if we cut ourselves off, a nation cuts itself off from trade, it'll find itself paying more in effective terms and real terms for the things it wants to enjoy and have fewer things to enjoy. Let's go get a full employment. Let's have a lower standard of living. - Yeah, if I could just make one qualification or footnote, which is actually a minor defense of mercantilist in some sense, 'cause we talked about our previous episode was on the gold standard and the great depression. I mean, one of the things that the mercantilist and the pre-Adam Smith period were reacting to is that the money supply was tied to how much gold you had. And so if there's an outflow of gold, you're gonna have deflation, and that might not be good for the economy in the short run. And that's where Milton Friedman came along, and said, "Hey, if you had flexible exchange rates, "you don't have to worry about that." 'Cause then you can have an independent monetary policy. So I think the case for free trade is actually stronger in the sort of post-World War II period because of Friedman and making the case for flexible exchange rates. Then when you're on a gold standard, which is much more rigid, you can't respond to various shocks. It's a monetary rule, but sometimes it can be a straight jacket as well. So I wanna go back to the point you made earlier that trade deficits in and of themselves with respect to the rest of the world or not worry some. And then we'll move on to looking at trade deficits with particular countries. So overall trade deficit that the United States runs with respect to the rest of the world, the capital accounts surplus that it runs with the rest of the world. How would you think about how to understand that? Can you think of cases where it's not healthy or what might be causing that mix to be what it is? Of course it could exactly balance out. America could invest the same amount outside the United States as the rest of the world invest in the United States. The United States could import the exact same amount of goods in dollar terms that the rest of the world, it's kind of a funny thing. It's not dollar terms 'cause they use foreign currency. So, but the dollar, some measure of monetary value of the goods and services US imports could be the same as what the rest of the world of course runs, but that isn't the way it is. US runs a trade deficit and a capital accounts surplus. Do I learn anything about the world from that reality? Well, the US I think really is sort of a special case in some sense. We have independent central bank flexible exchange rates that dollars reserve currency, but other countries, they might have to worry about their trade surplus or deficit a little bit more than the US does. And actually there's a great case from Israel in the 1950s and 60s where Israel had a massive trade deficit. It was called actually an import surplus. And Don Patinkin and some of the early Israeli economists were thinking about this and there's that word financing that you used earlier said we don't, it doesn't really apply to the US, but actually did apply to Israel. The only way Israel could finance and afford a bit massive imports from the rest of the world where it was just starting out as a country was through US foreign aid coming from Germany, reparations and things of that sort. And so the Israeli economists at the time were worried about well what happens when that aid shrinks, then we'll have to export to import. We'll have to export ourselves, we just can't rely on other people giving us douach marks or dollars to finance imports. That happened gradually and it wasn't really a problem, but there's the idea of financing your trade deficit is important and for developing countries that can sometimes be an issue where if you're importing way more than you're exporting at some point, that's being driven by foreign aid, that could dry up and you're gonna jumpstart exports in some way to pay for your imports. - And this is a little bit tricky 'cause they both have the word deficit in it. But the US runs a budget deficit as well as the trade issues we're talking about. A budget deficit means that the federal government spends more than it collects in taxes and it has to finance, in this case really, it does have to finance, it has to find a source to make up for that shortfall and over historically the US is borrowed. To the fact to the point where we're now, the United States now runs a large annual budget deficit has a large outstanding national debt of about $35 trillion because it's accumulated obligations to the rest of the world. - Does that interact with the trade and capital account surpluses or deficits in any way? - It actually does, you're absolutely right. There's something called the Twin Deficits Hypothesis, which says the fiscal deficit and the trade deficit sort of go not hand in hand, not one for one, but there's definitely a relationship and it's exactly as you were sort of explaining, the US currently has a fiscal deficit about 6.5% of GDP, which is really large when the economy is doing pretty well. And what that means is the federal government is to borrow a lot on capital markets. And of course capital markets are integrated. So part of that deficit is being financed by capital inflows us trying to sell our treasury debt not just to domestic residents, but foreign residents. If we were to close our fiscal gap, we wouldn't need to be borrowing from the rest of the world or relying on those capital inflows from the rest of the world quite as much. Obviously, we'd still probably have a current account or trade deficit because the US market is attractive for assets and it's still a safe asset, but we're just creating so much need to import capital in some sense. It is a driver of those deficits. And that deficit. That would come across. Yeah, that trade deficit would be smaller. I would think if the US borrowed less from the rest of the world putting dollars into the hands of foreigners. That's an important point too, because it's often said, trade deficit is something other countries are doing to us. They have mercantilist practices. They're manipulating their currency. They're engaged in unfair trade practices. They don't want to buy our goods because of protectionism. Well, sometimes we have to look at our home policies too, what we're doing. And maybe that's a driver and that's something we can affect change if we want to change our situation. And now let's move to the individual country case. Of course, many countries practice all kinds of protectionism of various kinds for across the products, for particular products. I remember when I was teaching at Washington University in St. Louis, my Japanese students in the business school were shocked to discover that American rice was actually pretty tasty. And compared to Japanese rice, they'd been told other lives that American rice was inferior. Rice plays a crucial role in Japanese culture. And that justified keeping out foreign rice to preserve the quality of rice in the Japanese diet and culture. And of course, that's a story that served the interests of a very small number of Japanese rice producers. It was useful for them to perpetuate a myth that American or foreign rice was inferior, which allowed the price of Japanese rice to be much higher than the price of rice in the United States because I think quotas in that case might be tariffs. I'm not sure. But the point is that many, many nations, including the United States, have barriers both explicit in the form of tariffs or quotas or practices and non-tariff, non-quota barriers to make it challenging to sell in their markets. Their natural barriers, things are far away. There's hard to sometimes adapt to a local market. So there are many, many reasons why it might be hard to sell abroad. But let's talk about the nasty ones. How does that affect the trade deficit between, say, Japan and the United States? That Japan doesn't let American rice come in. And America lets Japanese rice come in. Well, it actually doesn't affect the trade deficit directly, surprisingly, because currencies can adjust and value, goes back to the capital account. The trade assets are so large, the capital flows are so large. They're really the driver. And even if one country protects one sector or even a few sectors, it's really which way capital is moving that's going to be driving things. So protectionism doesn't necessarily change the trade imbalance. This gets to the idea of could we, the US, use tariffs to reduce our trade imbalance? And it seems to make sense that if we use tariffs, imports will go down, exports will continue on their merry way. And we just close the gap between them. But in fact, when you impose those tariffs, you do affect exports indirectly, either because your currency will appreciate, because other countries will retaliate against your tariffs. But you can't take exports as just being independent of imports in that way. So in general, countries that have high protection or protectionist policies, some have trade surpluses, some have trade deficits, and the same with free trade countries, some have trade surpluses, some have trade deficits, because there are other factors that are really driving things. So why does the United States run a deficit with some countries? And a very different magnitude, by the way, it's important to mention that. So the United States runs a trade deficit with respect to the entire world, foreign nations generally. But it's not even across every country. It's not divided by 200, the 200 countries in the world. It's not divided, it's not proportional to the size of the economy. It might be related, but it's not mathematically associated. A lot of people, unfortunately, I think, have decided in this moment that it must be, if the United States runs a large trade deficit with one country and a smaller one with another, that the large one must be because they're not letting in American products. And we need to punish them or incentivize them to change that. Is that true? No, I mean, you might remember from the childhood school days about the triangular trade where you get different regions trading in different ways with one another. So we've a trade surplus with Australia, for example. Why? Because we export a lot of mining equipment to Australia. And then they use that mining equipment to dig up minerals that they export to China. And then China exports steel and other things back to the US. So that's where you get the sort of circular flow of trade between different countries. And you don't need the bilateral balances. I mean, the supply is to us as individuals. Robert Solo famously said, I run a massive trade deficit with my barber. He never buys anything for me. And we all run big trade deficits with our grocery store. But once again, we earn money from other sources where we export, where we're selling our services to. So you don't need bilateral balance with every transaction that you're undertaking. I'm the same is true with countries. We used to have a big trade deficit with Saudi Arabia when we were a big oil importer. Not so much anymore, but that was sort of a natural thing. And then we'd have surpluses with other countries where we were exporting. They weren't selling us as much. And just to sort of emphasize the economic way of thinking and the challenge of, well, you might think of as budget constraints and math. You might think that you could fix each deficit with each country with the right tweaks and leverage. But it's going to, if indeed, the United States is an attractive place to invest, you're still going to run a net deficit with the rest of the world combined. The mix of any one country's bilateral relationship with the United States is complicated by the example you gave. It's complicated by the fact of that triangular trade. It's not-- you can't fix them all at once if that were your goal. It's not a good goal. We were both great. But if you tried to fix it, you'd find it didn't work. And another good example of this is the iPhone. And just sort of the mismeasurement of trade flows. So one of the reasons we have a measured large trade apps with China-- not the only reason, but one part of it-- is that China assembles a lot of products. The iPhone being a big one. So when that comes into the US, all that value, the iPhone, is attributed to China, because that's where the good's coming from. But actually, we export more components to China that are in the iPhone than the Chinese labor that's embedded in putting the iPhone together. In fact, the iPhone is just components from South Korea, from Germany, from Japan, from the US that are being put together there in China. It's not really a Chinese product, but it's attributed to it as a Chinese product when it enters the US, and it's recorded as a big import from the US. And Apple sort of knows this on the back of the iPhone. It says, designed in California, assembled in China. It's not made in China. It's mainly foreign components that China imports, and then exports the final goods to the US. I'm going to go bad for listeners, though, because I do like to challenge my guess. But on this case, it's kind of hard for me. I don't want to be just a choir. I do want to offer you some tough questions, but you and I both share a lot of views on this topic. So I'm trying to, I'm trying to, I'm doing my best listeners. So I'm going to give you a heart really hard when I get ready, Doug. - Thank you, sure. - So are we. - So, okay, it's assembled in China, and that means they've got all the assembly jobs. If we, through whatever policy, whether it's tariffs or quotas or legal restrictions, if we could stop that importing of the iPhone from China, we could bring those assembly jobs back to the United States and those manufacturing jobs are the jobs that we've lost. And a lot of people are arguing that we need tariffs now to bring back the manufacturer jobs that used to be here. What's wrong with that argument? - I think the comedian Dave Chappelle put it best. He said, "I want to wear Nike's, I don't want to make them." - Yeah. - It's pretty tedious work of assembling things. Actually, the New York Times, I believe it was the New York Times, had a great article just the other day on textile and apparel manufacturer in the south, which all those jobs have been lost by and large. They interviewed some former workers, and they said, "I would never want my children to work the way I did. You come home with lint in your hair, lint all over. It's bad for the lungs, so you have health issues. It's tedious, it's monotonous." And very few of those workers said, "Yeah, these are the kind of jobs that I want my children to have in terms of their future." So a lot of the basic manufacturing jobs are very rote and not so interesting. And once again, dislocation, as you pointed out earlier, when that happens, it's very costly. You're depriving someone of their livelihood, and it's very difficult to retrain for other types of jobs. But in terms of the 21st century economy to aspire to be assembling iPhones or are so stitching together shoes, there are many more other opportunities that I think we could be offering workers in the US. - I think it's important to point out that there's a lot of romance about those jobs that were romance that was true 75 years ago, 1950, but isn't true today. In 1950, a manufacturing job was a good paying job. Not so much today because it doesn't require much skill. There's a lot of competition. But we could bring those jobs back and they would pay more in the United States for a whole bunch of reasons, mainly to attract people to them away from other things. And that of course would mean that the iPhone, if it were assembled here, there would be more jobs in the assembly and manufacturing business. Those jobs wouldn't pay like they did in 1950 relative to other opportunities, but they would be jobs here in that activity, but they would be less efficient to produce them here, which means that the price of the iPhone would be dramatically higher, which would mean that either people would lose the pleasure of that 'cause they decided they couldn't afford it, but if they still decided to afford it, they'd have fewer resources to spend somewhere else in the economy. And that would mean their employment in those areas would shrink. And that's the unseen part of this complex story that I think is so hard for people. They see the first effects. It's hard to see the second and third unless you studied economics and thought about it, but and that's what we're talking about today. - You're absolutely right. It's that sort of that opportunity cost that sometimes gets missed. And I think there's some estimates to say the price of an iPhone would be up to $2,000, possibly $3,000, it was manufacturing in the US. But there's another important distinction to make here between bringing back industry and bringing back jobs. So we might, through tariffs, bring back some industries. Of course, there's an opportunity cost and that may not be a good idea, but we don't necessarily bring back the jobs. Precisely because wages are so high in the US and it would be automated, or there'd be pressures to automate in the US. So we could bring back some steel production jobs, but once again, the way we made steel in the 1950s and '60s is not the way it's made today. Back in the, even as late as the '70s, you'd see a lot of blue collar workers, physically in the plant moving molten steel and filling molds and things of that sort. Now you look at a steel production facility in the US, it's completely automated. You don't see anyone. So you can bring back production, albeit inefficiently at a higher price, but the jobs aren't gonna follow. So once again, we're really in the 21st century in terms of what we have in terms of labor market and it's not the way it was back in earlier periods. - And your insight really highlights the connection which seems strange, but is quite real between technological innovation and trade. Both of those things are ways that we get more from fewer resources, right? It's called productivity. So in 1950, the number of workers that would work in a certain kind of plant would be a much higher ratio of labor to capital, many more workers per machine. In today's world, it's very, very small. Part of the reason that manufacturing as a source of employment in the United States is shrunk to very small levels under 10%. As a proportion of the entire workforce, partly because factories have moved to Indonesia, making nikes and trying to do and steal, but part of it's because you don't need as many workers to make steel in either place as you did 50 years ago. - And that's a fabulous thing on average. Not a fabulous thing for everybody. Don't wanna do it, look at it through rose color glasses, but that's how the world's standard living grows. That's how we get more access to things we care about. And more free time if we want it in terms of leisure. So I think it's really important. We could bring back, you said we wouldn't bring back his bank jobs, we could bring back the assembly industry and we could make it illegal to use robots. And then there'd be, not just the industry would come back, the jobs would come back, but they couldn't be very high paying jobs. - Oh, well, let's just light that too. Well, if you do, that means that there'll be less, fewer resources to do in other areas. You can't have all the things we have, all the extraordinary things in the 21st century. If you insist on using 19th century or mid 20th century technology, it doesn't matter where you put them. You're gonna have a lower standard of living. - Yeah, I mean, with the work of the steel industry, in the 1980s, it took 10 worker hours to produce a ton of steel. Today, it takes one worker hour to produce a ton of steel. We're producing basically the same amount of steels we did back then, but we just need fewer workers to do it. And that's productivity, as you said. And so, once again, we're not gonna advance as a society. And this goes back to Adam Smith's Wealth of Nations, too. Productivity was the heart of the division of labor, specialization, and the wealth of the nation depends on improving productivity. So, now I'm gonna give you a really hard time, Doug. That's a terrible attitude, you just said. Oh, the only thing that matters is money. So you let a bunch of industries disappear because of your policies that you favor, these free trade policies. You let those factories go to China, you let the robots come in, and as a result, the small towns of America, which used to have decent standard of living and decent wages, they're all gone. That's what the Rust Belt is almost by definition. It's rusty because it's old and beat up and decrepit. And that's because of the economic policies that economists advocated for. And what those did is they helped rich people, but they didn't help the people who used to work in those factories who had a decent life and could afford to have a car and a mortgage and an educated children. And so what this policy of free trade is done is made their lives horrible. And enriched a few fat cats in finance. - Well, there's no doubt that there are many communities in the Rust Belt that are really suffering and have not done well. But what's interesting is that a lot of those industries did not migrate overseas, they migrated to the South. So one of the videos I showed at my class is a small town in Pennsylvania, Tamakwa, Pennsylvania, where a textile mill closed down. And one of the interviewer of the workers, he said, you know, all the jobs, you know, the plants have shut down and they move down south. So Mac Truck used to have a plant nearby. That moved down to South Carolina. If you look at foreign auto producers in the US, they're all in Alabama, South Carolina. And, you know, the North Carolina industry, a state is really an interesting one 'cause they've made the transition from textiles and furniture to medical services, healthcare, advanced research and the research triangle. So it is possible for regions to, you know, bloom and do better. Do the Rust Belt, I think, you know, here you have to get into, well, our unions too strong. Our regulations to honor us in Pennsylvania and Ohio. So you're not getting those regenerative industries. But also there's a difference between the small rural towns where if one plant closes, there's not many opportunities and a place like Pittsburgh, which is a flourishing cut city, used to be steel 30, 40 years ago. But one thing they've made the transition to different industries. Once again, because it's a city that was much more diversified. So other things could grow up as things were sinking. But there's no doubt for rural communities where there's only one plant within 30 miles. If that plant goes down, that's community's gonna suffer. And there's a big debate among economists about, do we help the people there? Do we help the place, place-based policies? It gets very complicated. It's very difficult issue to deal with. I think that we've talked about it in the past on the program a great deal. I care about the people, not the town. So the children and grandchildren of those textile workers, whether they were in Lawrence and Lowell, and those jobs then migrated to the Carolinas, or whether they were in the Carolinas and those jobs eventually migrated to typically to Asia. The jobs are gone, the industries are gone. The towns are beat up, but the children move to the cities, the grandchildren now, where they found tremendous opportunity. Opportunity that wouldn't have existed if we had kept all the jobs in the industries statically the way they were for all time. All the most, a lot of the most pleasant jobs today, podcaster, for example, a very safe job as opposed to working in a mine or making steel. Those jobs are only able to be afforded because we've allowed resources to move to their most valued use. We've a lot of competition to move some industries outside the United States, but here's the but. But some people don't want to move to the city, and they stay in that town, and the economic opportunities are right up there, and they're on fentanyl and they're dying because they are both depressed, and they've got nothing to do, and the jobs aren't available. And it's not literal suicide, sometimes it is, but a lot of times just people can despair because the things that their parents and grandparents did aren't available anymore. You don't want to do anything for them? - That's a hugely important issue, and it's not my area of expertise in particular. How do we help individuals or communities if we care about the community as well, in terms of overcoming some of these hurdles and the difficulties of economic dislocation loss, and then the societal consequences of that. But once again, it's not just trade, and throwing up trade barriers isn't gonna be the solution. There's a very good book by a Washington Post journalist called Jamesville. It's about Jamesville, Ohio, Wisconsin, where a GM plant closes down, and she tracks what happens to the people, and the plant closed down during the great financial crisis of 2008-2009. And what's interesting is that, so it wasn't trade, it was just a recession, huge social consequences for the town and for the workers. GM offered to hire all the workers who were laid off at different plants across the Midwest, just reallocating production away from that plant elsewhere. Only about half the workers took it. A lot of those workers commuted from Wisconsin to Ohio, leaving Sunday night or Monday morning and coming back Friday night, 'cause they didn't want to leave their communities. They did all right, so their uncle or exactly, yep. They at least had the income, so they could sustain that, but the many people said exactly as you were suggesting, you know what, I don't want to move. I want to stay here. You're not going to do as well, because once those jobs were paying pretty well, and then the social dysfunction is a downward spiral. So it's not just a trade issue, it's an economic change issue. How do we deal with economic change in that case? And there are no easy solutions, I think. - Well, you said you're not an expert. There aren't any, how to deal with this. This is a very, in my view, I once, for better or for worse, wasn't really a pleasant experience, but I once agreed to debate somebody on trade and at some library in St. Louis when I lived there, and turned out most people in the room, about 100 people there, about 97 and then were related to the guy I was debating. They were very sympathetic to his views. They were not sympathetic to mine. It was a character building experience. There's a large Chrysler plant. I think it was Chrysler in that area of St. Louis. Dick Gapart was there, Congress representative, member of Congress, and people would tell me, "You need to send Dick Gapart your book, the choice." I'd say, "I don't think that's gonna make a big difference." I think he probably has some understanding of terrorist work, but he's trying to help his constituents, and I get it, I disagree with him, but that's his choice. But the end of that debate, a question from the audience, when it was the brother of the guy I was debating, he said, "I worked in the auto industry for 30 years, 40 years, made a good living, and I just got laid off, and your stories are nice about how this helps the standard of living or future generations, but what about me?" And I said to him, "What do you want me to do for you?" I said, "I want a welfare check. It's one of the ways you can cope with." He said, "Doesn't know easy answer." I said, "You want a check to soften the blow?" He said, "No." He said, "I want my job back." Of course, what he really meant was I want the dignity that I once had from taking care of my family and earning a living, and I get that, and it's very, because my goosebumps, just to think about that moment. Now, I don't remember whether I told him this or not, but the only way I can get your job back is to prevent your fellow citizens in the United States, the freedom to buy the kind of car they want. Do you want me to do that? I can do that. We can pass the law, we can ban foreign imports of cars, that'll get your job back. Of course, you'll be taxing implicitly your fellow citizens for forcing them effectively to buy from you in your company. So you're still getting a handout, actually. It just is hidden, but you'll have some word, you'll have word dignity and it won't feel like a handout 'cause you'll work for it in a way you wouldn't, if I just put you on some what's called trade assistance, you know, it's a literal welfare check. And I think that's a legitimate issue. I think that's an argument for softening or stretching out or delaying economic transitions. There's a big question if we really could have driverless cars. There's a lot of people who drive cars and trucks for a living and they're not gonna quickly transition to some new opportunity if driverless cars and trucks come along. Those who are gonna be unemployed, we can give them a welfare check, they're not gonna be happy, and I don't blame them. They're gonna be miserable and they're gonna have very little dignity. So I don't think these things are unimportant and I think it takes a lot of creativity. But the truth is, if you wanna live in a system of economic change and freedom to let people buy what they want, where they want, these are kind of things that happen and you wanna soften those in different ways. If you can, besides just giving them money, maybe it's delay, give them better education. - Yeah, I mean, that's very powerful moment and you expressed it very well. And I'm once again reminded of Adam Smith who said that when you're reducing trade barriers, you have to do it slowly and gradually out of humanity. I think that's the word he uses, humanity. And that's the way the US has basically done it. Now, we still have these shocks every now and then, and obviously technological change is always there in the background, but how do you compensate workers? We always say, well, just give them the money. That's sort of the efficient way of doing it, but you're right, that doesn't really get the gut issue. So economic changes can be a painful thing. - Yeah, and a nation. - But once again, if you arrest the progress, you're foreclosing opportunities for the future. And then, you know, you get coal miners forever. And we're stuck in very, you know, very difficult, laborious jobs. So it's a short run versus long run transitional issue. - Yeah. So going back to the question of bilateral trade deficits, particular countries, the Trump administration announced a whole complex set of tariffs. I didn't follow all the balls and strikes of whether the way these were calculated, but they're different for every country. They seem to be somewhat based on the size of the trade deficit. And in the aftermath of that, and the conversations about it, people did talk about these non-tariff barriers that are still there, right? So one argument is that this is a negotiating technique, but let's for a moment say it doesn't work, or it's not a negotiating technique, it's designed to keep up foreign goods. Are there serious non-tariff barriers that we know about that might be making it hard for certain industries to sell in certain countries? - That can be because tariff levels are pretty low. I mean, word reciprocity is used a lot, that there's a lack of reciprocity. But if you look at our major trading partners, the European Union, Canada, Mexico, a lot of Asian countries like Japan and Korea, their tariff levels are sort of approximately like ours, at very low levels, 'cause we've negotiated over time, or we have free trade agreements with them. So then you have to sort of look behind those tariffs and say are there regulatory barriers. And once again, it's sort of, it's harder to point to, but it can also be an excuse for other things that are going on. So people say, well, the Trump administration said, we don't sell cars in Japan. Well, that would require us to make smaller cars where the steering wheel is on the right-hand side, not the left-hand side. That's a lot of retrofitting, and I don't see GM and Ford really doing that because they want to sell a lot of cars in Japan, may not be worth the cost for them. So just because they have a zero tariff on cars in Japan, doesn't mean that there's some barrier for us selling our cars there, is just that their cost to tailor your product for that particular market. And I don't think the US producers have tried to do that. So just because there's in that huge imbalance and the way cars are going, is an Ipso facto evidence of unfair trade or some sort of trade barrier? - Well, let's say it is, let's say there's corruption or let's actually a better phrase would be say opacity, non-transparency, it say at the ports or at the docks, or there's all kind of subtle ways that it could be just cultural even. It could be people are discouraged emotionally from buying, culturally for buying foreign products. I just recently read about person whose father worked at Bethlehem Steele. At Bethlehem Steele, you could drive a foreign car. It wasn't a rule, I mean, it wasn't a law. It wasn't in your employment contract, but everyone felt, I think incorrectly, but let's give them the benefit of that for the moment, that buying a foreign car was a form of treason, disloyalty. Again, just to make it clear, if you buy a foreign car, you're an American who buys a non-American car, we just remind everyone that American made cars have all kinds of foreign components in them, often have a higher proportion of foreign components than so-called foreign cars assembled in the United States, even would also point out that would you buy a foreign car that is cheaper because you have access to a foreign car. And people are free, culturally, to buy non-American cars. That puts competitive pressure on American cars. They get better. Cars are much better today than they were 75 years ago. And one of the reasons is there's competition that pushes manufacturers to make their cars better and cheaper and more efficiently using robots and all those things we talked about. And that frees up resources to create other kinds of American jobs. So when people say, oh, you bought a foreign car, you took a job away from American, it's not true. So I just want to say that and get that, and you can comment on that. You want to comment on that? - No, I think you put it very well. And once again, one of the things about globalization today as opposed to 40 years ago is that we've so much trade in intermediate goods and components in parts. So if you look at a Boeing aircraft or a automobile manufactured in the US or Canada, or the iPhone, it's really internationally sourced. You get very specialized producers who just do wing tips, just do the landing gear, just do the interior seats, just do the chassies of various cars or aircraft or what have you. And then firms are putting all these things together. And that's an incredibly complicated order. And it's also one that firms have found to be efficient rather than doing it all themselves. There used to be a plant outside Detroit called the River Rouge plant produced, I think it was forward. And they produced glass there. They imported sand to make the glass. Then they import iron ore from Minnesota and made the steel there. They did everything on site. And that's just not the way you make things anymore. It's much more efficient to rely on suppliers who specialize in producing very individual components and then you put it all together. - But I derailed myself. So I suppose it's true that, that's not used culture. Let's suppose there's an unwritten law. It's enforced through regulation up through the way monitoring of bureaucrats that makes it really hard for American car companies to sell in Japan. Let's pretend it's not the side where the steering wheel is on. It's not the narrowness of the roads and that Japanese people like smaller cars. They just make it really hard to sell American cars there. Should America try to do something about that? There's a great British economist Joan Robinson who said we shouldn't throw rocks in our harbors just because other countries have rocky coasts. That is just because other countries throw out trade barriers doesn't mean that we either have to impose trade barriers ourselves or respond to them by opposing trade barriers. They're hurting their standard of living. They're hurting competition in their market by closing their market and it imposes a little bit of a constraint on us. We don't have access to those commercial opportunities. But it's fundamentally not first order for us. That'd be one response. If India wants to have a closed market, China under Mao had a very closed market. Should we respond by closing our market that doesn't seem to make too much sense. If we want the competition, if we want the variety, if we want the gains from trade. But another, if we have a closed trade ties with some countries and they have these sort of barriers, then there's always the opportunity to negotiate. So we do have trade agreements and I know sometimes those who like free trade don't like these trade agreements 'cause they're often long and complex and regulatory and what have you. But those are agreements to sort of establish the rules of the road. And certainly if they're in violation of an agreement, you want to enforce it. If there's non-tariff barriers that are outside the agreement, you sort of talk about it and you sort of work it out. Retaliation sometimes works and sometimes doesn't. Actually, Adam Smith has a great passage in the wealth of nations on that. And so I think you have to sort of consider these things but not automatically respond by closing your market just 'cause other countries have high trade barriers. - Yeah, one thing, man. - Sorry, go ahead. - One of the things Adam Smith said is that if you retaliate against other countries for their unfair trade barriers, you're reducing trade even more and you're not helping those who are hurt in our country from those trade barriers in the first place. So it's not compensating them. And he says you're doing a double injury by responding in that way. - We'll come back and talk about 3G chess in a minute but 4D chess, 4D dimensional chess. But I just want to mention that we haven't talked about, which is once you open the possibility that the federal government or the president will intervene on behalf of a particular industry claiming that there is something unfair about it, the way it's being treated abroad, you open up a mischief of what's called rent seeking, meaning favors to particular industries for political gain that actually aren't helping the country's whole, merely helping those players. So these tariffs are not going to be put on by all seeing visionary, good-hearted economists. They're going to be put on by eventually, we worry would be put on by people who are pursuing merely their own naked self-interest. The other thing I want to say something about, what you said about trade agreements. When in the 1990s, when NAFTA was on the table, North American free trade agreement, which created a free trade zone between the United States and Canada, Mexico, I tended to be pro NAFTA. I remember talking to Melton Friedman and he said he's against it. I said, why are you against it? He said, it was not a free trade agreement. So what do you mean? He goes, well, it's full of, it's fat. It's a thick document that has all kinds of special carve-outs and special treatment of this industry and that industry and delay of the things we were talking about, phasing and things very solely or never at all for certain industries. So we should just say our borders are open to your goods and services. If you can compete effectively, you will make us richer. You'll make our lives better. Again, putting aside transition issues, that that might suddenly, doing that suddenly for a protected industry would be, could be harsh for some of the people involved. But as a general rule, Friedman argued that we don't, shouldn't have these free trade agreements. So there's a strategic question of that and the 3D or 4D chess argument is what the current threat of tariffs is, we're in this inner-regnant period where, or this inner-imperial, where there's a 90-day hold on what some of the tariffs are gonna be put on at the levels that were originally published a few weeks ago. This is just a negotiating technique. It's just a way to get them to treat our products more fairly. What's your reaction to that? - Well, I'm a bit skeptical because the administration's also talked about using tariffs to bring back jobs and they sort of want them as a permanent feature of the U.S. economy rather than just this temporary bargaining chip. And so you can't sort of achieve both at the same time. Either you're raising the tariffs because you want to bring back the jobs and, you know, reshore manufacturing or you raise them, but then they're not gonna be bring back jobs because everyone's waiting for the deal to be made to bring down the foreign trade barriers. There's someone on Twitter that had something nice saying that logic is sort of like this, that free trade has destroyed the middle class. Therefore, we have to end free trade by raising these trade barriers. But if other countries to come to reach agreements with us, then we'll go for more free trade by reducing our tariffs and they'll reduce theirs. So it's sort of like, is the goal free trade or is the goal to seal off the U.S. market so that we get manufacturing investment back here? You can't sort of use it as a bargaining chip and use it as way of leveraging foreign firms to locate back in the U.S. - I would just add that, again, while there are certain people, particularly with little education, people who just particularly didn't finish high school or who finish high school but don't get a college degree, some of them have had economic challenges over the last 50 and 75 years. On average, American middle class, to the extent it's disappearing, it's disappearing because people are becoming upper class. The measurements that people use, the artificial boundaries of what's called middle class have changed because people have gotten wealthier on average. Now, I don't want to be naive. I don't want to be an idiot and say, all we care about is on average, we don't. But it's important to remember that on average matters, it does capture something about what's going on in the United States economy. This idea that only a few small narrow group has been improved by the economic policies the last 75 years, I would add, economic policies are quite complicated. And in general, they've moved away from economic freedom. That's another whole question that somehow, this argument that somehow we've been living in this free trade, free market paradise for the last 75 years is literally not true. But with the full complexity of that, the average American is doing much better. Now, it's true there aren't anyone's call the, who is the average American? But millions and millions of Americans have higher standards living than they used to. And that's not a small thing. It's not an important transitions matter. Our opportunity to stay near your family is a lovely thing that we might want to take into account and how we allow free economic freedom. I'm open to that, but we should not argue that we need to reverse free trade because the middle class has been destroyed. The class is thriving in the United States, not every single person, but it's thriving. And poor people are richer than they were 100 years, 60, 75 years ago, 50 years ago. We'll put out some links to things that make that case. But if you listen to the news, you think, oh my gosh, free trade's horrible. Look how horrible the United States is doing. So I could agree with you on so many aspects of that. I think of Mark Perry's chart, exactly on that, showing that the share of households in the middle class has shrunk, but they haven't moved down. They've moved up. The share of households are higher income, have increased. There is this, you hear this in the media that inequality is increasing, that the middle class is stagnating. And once again, there was a bump up in inequality, but it's not like it's been secularly rising. It sort of fits in starts and sometimes it declines. And it's actually plateaued for, since the great financial crisis in terms of many measures. So, but the arguments keep coming back that we're sort of on this inexorable path of increasing divergence. And that once again, it's not that bad. - In the word secular in that explanation means overtime, not non-religious, just for the non-economists in the room. I want to give one more 4D chess argument, which I've heard, which I find fascinating. And it could be real. And again, in this whole conversation, I make now stick about what President Trump's real strategy, I have no idea, he's got something very thoughtful in mind, very unthoughtful, or whether his people who are promoting this understand this, or don't understand, we're just, it's off the table. But I did hear this argument, which is really interesting. So I mentioned earlier, the United States has a $35 trillion obligation to the rest of the world, the national debt. Some of that goes to, is Americans holding US treasuries, but many, many dollars of that are held by foreigners. And the interest payments on the national debt are in the last year that I noticed. I think it was 2024, but it doesn't matter. It's just a general point. We're about $300 billion. That's roughly within a billion, the US military budget. So what that means is, is that the United States is paying roughly the same amount to honor the promises it made in the past to people it borrowed money from, as it pays to maintain the armed forces in the United States and the equipment that they produce, the munitions. That's little scary. It raises, not because, it's the same size of the military, it just, I'm just using it as a measure. It's a little scary 'cause it's a lot of money. And it raises the possibility, you mentioned earlier, that you gave the example of the absolute size of it as a proportion of GDP raised the possibility that at some point the nations of the world might not want to lend money to the United States. And that would be a rather extraordinary dislocation. We're talking about dislocation, adjustment, and transition. The United States suddenly found itself unable to borrow money from the rest of the world because people were worried about the possibility of it being repaid or the promises on interest being honored. That would cause, I think, an enormous disruption in the US economy and in the world economy. And so some people suggest that what these tariffs are doing are threatening foreign countries as a bargaining chip to renegotiate the terms the lengths of the treasuries and notes that the United States has used to borrow money. That is, to get a lower interest rate, to effectively say, we let this money in the past, it was a lot of money we're paying you back and we'd like to change nothing about we're gonna pay back. We're gonna pay it all back. We're gonna honor the promise, but we're gonna pay it back over a different term, a different timeframe at a different interest rate. And we'd like to swap out and renegotiate that promise. That's an interesting argument. I don't think it's true that that's what it's this about, but it could be, and that would be for DHS. That would be an interesting way to lower the fiscal burden on the United States of spending more than it did for the long length of time than it did relative to the taxes it collected. - I had not heard that argument, that's fascinating. Strikes me, first of all, that it's a partial default. If you wanna renegotiate, that's something we haven't done in more than 200 years of US fiscal history. So that would be stunning. And if it is the case that that's sort of a motive, it's not working because what we've seen once again, is very specific to April of 2025, is that US Treasury yields have been rising quite a bit after the announcement of these tariffs. And the dollars fallen, these yields are rising, which in gold prices are rising, which sounds like people are pulling their money out of stock market and US in selling US Treasury debt and going into other assets. We talked earlier about the trade deficit. When this is one way to get rid of the trade deficit, if foreign countries are not willing to, or it's nearly not countries, foreign investors are not willing to put their money in the US anymore. And we're gonna see a great shrinkage of that deficit. And of course, it might also be accompanied by a recession with higher interest rates. You know, if we don't borrow from abroad, it does mean higher interest rates at home. And it makes it harder for us to finance our fiscal deficits. So once again, if you complain about the trade deficit, this is one way of reverse it, but it's also a very hard lesson that I think we're gonna learn about how do you have to balance your fiscal books and other things if you're not gonna rely on foreign capital markets. - The thing I would add is that some of the bumpiness of April 2025 isn't necessarily entirely due to the wisdom or lack of wisdom of the policies that are on the table. I think a lot of it's due to the uncertainty about what's next. So there was this sort of rosy idea that these, this threat of tariffs or imposition tariffs that'll bring investment back to the United States because people will have to produce some of these goods here and that'll be great for manufacturing and we'll get these expanded opportunities for Americans. And instead, I think what it did is that people said, oh my gosh, this is a huge change of policy. What's next, how long is it gonna last for? As so many people reacted to this policies if it was gonna be permanent. There's no such thing, dramatic changes in the economic environment and the rules of the game. Those don't encourage investment, they scare it away. And no. - Absolutely. - And here's where there's that contradiction between using the tariffs to bring back jobs and bring back manufacturing and applying they're gonna be in place for some time to come versus using them as a bargaining chip to get rid of foreign unfair trade practices or what have you, because if you're a firm and you're thinking about a major plan, this is a multi-million dollar, if not a billion dollar commitment, it's something that takes years to plan and break ground and work out. And the uncertainty, are the tariffs gonna go up? How long are they gonna be in place? If you don't know that, you're not gonna commit to some huge investment that you might not otherwise make. And so I think we're seeing that freezing of investment partly because exactly you pointed out uncertainty about what policy is gonna be six months, a year, five years from now. - And I don't, I don't, you can't quantify this, but a lot of people to cry the government structure of the United States, all the checks and balances and the Trump administration is showing that, hey, you know, we can spring into action here. There's a big question of whether these changes are gonna be sustained, there's gonna be core challenges, but what we've observed in the first few months of the administration is that, you know, if you put your mind to it, you're willing to burn some political capital, you can do a lot of stuff. One of the virtues of a sticky system that has lots of bottlenecks politically is that things don't change very quickly. And that leads to a stable, generally a stable, economic environment for taking risk. And right now we're getting a lesson in what the cost of a more flexible policy world is going to be, maybe we'll see. - Yeah, this is actually a big problem and a big change, is that usually whenever there's a big change in public policy and trade policy, there's a societal consensus or political consensus, we gotta move in this way. And there's a big political debate and involves the house, involves the Senate, involves civil society. You know, I've got this book over my shoulder clashing over commerce, which talks about big changes in US trade policy over time. It takes a lot of discussion, debate, and what have you. And we're not having that now. This is one person, the president, sort of unilaterally making big changes. And he's allowed to because Congress has delegated a lot of authority, but we don't spoke out NAFTA earlier. There's a massive public debate about that. Hearings had to go through Congress, a lot of pressured groups arguing favor of against. There was a national debate about it. Here, there's not really been much of a debate as the president saying, "This is what we want to do." He's finding the reaction is very surprising in terms of financial markets 'cause it was sort of sprung on them. And now they postpone them for 90 days. That adds to uncertainty. There also adds to the questioning of, "Well, what is the ultimate goal?" And is Congress gonna have a role in this or not? And so we're just in a very different political situation than we've been in recent years. - Just a footnote to that, when you said Congress has delegated authority, they literally delegated authority. And I think 1962 or 1964 Congress in the Constitution of the United States has the authority to levy taxes, and which tariffs are one. In 1962, I think, or four, they said, "Well, but the president is allowed to put on tariffs "for national security reasons." And now that's the role we're in. Everything's in national, it's just about on that grounds. Congress could challenge that. The courts could challenge it. Or somebody could challenge it through the courts. I assume that will happen. It is really weird for the president of the United States to arbitrarily, and this has been true. This has always been true. It's a weird thing. It happens to be president Trump right now. It's a weird thing that the president of the United States can arbitrarily decide, a tax rate on United States citizens without Congress's approval. - Yep, usually all tax bills begin in the house of representatives. That's really weird. We debate these things, and yet not in this case. - Just a small technical point here. It's actually not small. It's not really technical, but it gets talked about this way. There's actually a debate in the press, and in the social media about who's going to pay for the tariffs. Meaning are the American consumers going to have to pay higher prices or are foreign suppliers going to have to bear the brunt of these higher taxes on imports? So when argument is only on imports only, and the import will have to pay the tax, whether it's the foreign person who's bringing it in or the literal importer, but not the consumer. What do you think of that? - Well, literally the importer pays the rights to the check to the government to pay to give goods in, but then they have to pass that on to consumers in most instances because they don't have deep pockets where they can just absorb a 10 or 20 or 30% tariff. A personal example of this is when tariffs were announced on Canada and Mexico, I'm living here in New Hampshire very close to the Canadian border. I got an email that day from our propane provider, which provides heat for our house, saying even if you had a contract with us that fixed the price, we have to rip that up because this tax may be imposed and we're going to have to pass that on to you. So we're going to have a surcharge on the propane we deliver. So that's that passing that tax forward. For many years, we didn't have too much evidence on who bear the burden of the tariff 'cause we didn't change tariffs very much and they weren't very high. But during President Trump's first term, we imposed tariffs on steel products, aluminum, we opposed it on many products from China, but some not. And there have been about half a dozen papers that studied who paid the burden of those tariffs, who paid those tariffs and almost every case it was passed through 100% to roughly 100% to the consumer, passed forward to the next buyer of those goods. Once again, it's not like these merchants have deep pockets where they can absorb them and when to keep prices low for consumers, they have to pass that on. So yes, ultimately the buyer will pay those tariffs. - What about the American producers of those products now that they don't have, now that their competition is more expensive, aren't they going to get more businesses not going to be great and as a result, the consumers sold, they'll buy American now. That's what's wrong with that. So yeah, they won't, you say they'll pay 100% of the tariffs. Yeah, but most people will just switch to American products. - Yeah, but then here's a great case. A lot of these are imports. In fact, about 60% of our imports are intermediate goods, components and capital goods. So it's not us as households who are buying these products. It's other businesses. And when they have to pay these higher costs, it raises their costs. And so, for example, the steel tariffs. That's going to help out a few steel firms. Yep, they might have to ramp up production a bit. They can charge higher prices, put on an extra shift, maybe even higher for-- - To buy more workers. - Yeah, to buy more workers. But guess who buys steel? I mean, I don't know about you. I don't go out and buy a buyer steel every weekend when I go to Home Depot where it loads for home improvement. But guess what, John Deere, Caterpillar, Ford, GM, every state and local garments trying to repair a bridge and repair infrastructure, any construction firm that's trying to put up a new building, they're buying a lot of steel. And you're raising their costs, and then it gets to back to your point about the unseen. If you're going to spend a lot more on bridge repair, well, what aren't the state and local garments going to be able to spend on, or are they going to have to raise taxes? If you're increasing John Deere or Caterpillar's cost to produce heavy earthen moving equipment or farm equipment, first of all, they become less competitive against Komatsu and other foreign rivals that don't have to pay those inflated costs on their steel inputs that can export to the U.S. And also beat the U.S. in terms of foreign markets. So if we're trying to sell farm equipment to Latin America or Australia or New Zealand, it's going to be tougher to compete against foreign rivals that don't have that 20 or 30% cost inflation in terms of their steel inputs. So once again, you're helping some small firms or small small segments of industry, but there are many downstream effects that are going to be very harmful to the competitive position of various producers. In fact, a number of studies have shown on net we lost jobs from the steel tariffs, rather than gain jobs, because there are more people employed in the downstream user industries than in the steel industry itself. I would just add that when people try to buy American products and increase the demand, those producers are going to raise their prices even though the tariffs don't apply to them. So it's not just a component issue. It's competition is going to even force the price of American and foreign goods to either be the same or there'll be no foreign goods at all and everything will be American in which case, the price will be much higher. So this idea that somehow the tax is only levied on foreigners is I think incorrect. So you mentioned your book a minute ago. You said this is a book of your shoulder, it's hard for people watching said YouTube to see that it's written by Doug Irwin, but it is, it's called Clashing over Commerce, a history of US trade policy. What do you think of this moment? And I couldn't have imagined it, which is I guess not really interesting because there's so many things in the world today that I couldn't have imagined, which breeds humility, but as a historian of trade and trade policy, how does this, how do you think about this? How does it compare to past episodes? A lot of people said this is we're going to relive the glory days of the McKinley tariffs of 1896. We're going to bring back the US industrial power of the 19th century. You comment on that and then just more generally about this moment. Well, it's really unprecedented. And it's off the charts on so many dimensions in terms of the decades and centuries that I covered in my book, where trade politics was actually sort of relatively normal. It had to go through Congress a little bit later on after World War II. Some authority was delegated to the president to reach trade agreements, but they still had to go back through Congress. And there's a broad political consensus. And here what's unusual is, first of all, one person or one administration is making huge changes in the direction of trade and branch. One branch, yep. And it's not just, and when we go back to considered tariff acts in the past, the tariff had already been fairly high because of revenue purposes and it was sort of built into the system. And so even the smooth holly tariff of 1930, which is sort of infamous, was an adjustment in the rates a little bit up. A lot of the past tar acts were just adjusting things, a little bit up or down fine tuning things, not going from a period from a place where the average tariff on imports last year 2024 was 2.4%. Going from that to like 10, 15, 20, 25% on average, somewhere in that range, depending on the configuration of tariffs that's going to be implemented. And then of course, over 100% on China. To do that overnight, that's a huge change in policy. Once again, without so much of a national debate, we're also much more open and exposed to trade than we were in the McKinley era of the 19th century when imports were maybe 5% of GDP. Now imports are upward of 10 to 15% of GDP. So it's going to be a bigger shock to the US economy. And I think the stock market reaction has sort of indicated that. So I thought I had seen it all in writing over 200 years of trade policy history, but this is really, really unique and unprecedented. So let's close with this. I have a phrase in my book, the choice where I say self-sufficiency is the road to poverty. And the word self-sufficiency has multiple meanings. One meaning is stand on your own two feet, don't accept welfare or charity. It means to support yourself on your own, as an individual. What I meant by it though is that if you decide to close your borders and make everything yourself, you're going to be very poor. I also like to say we tried by local ones, it's called the Middle Ages. The Middle Ages, you couldn't trade a lot with people far right from you, it was very expensive. There was some trade in small things like spices that you could transport in bulk. They make a lot of money off of 'cause they were extremely scarce. But in general, people weren't making stuff and selling them to foreigners or to even people across the country because it was incredibly costly. And so you lived in inevitably a low-standard living because you only had a limited number of people to trade with. One thing we haven't talked about is the relatives have unimportant some borders in terms of standard of living. I'll put an essay up a line and it talks about that, the human side of trade. Borders are not unimportant for cultural reasons, but for economic reasons, I think they're misunderstood. But self-sufficiency is the road to poverty. I live in Israel, if Israel were to close itself off to the rest of the world, Israel would become desperately poor. An enormous amount of wealth here is generated and standard of living in general here in the fact that the world wants to trade with us that Israel produces many things that the world wants. That it's innovative. So if Israel pursued a close border policy and put 20% tariffs on or doubled the tariff rate, tripled whatever we're talking about, quite a little bit more than that, Israel would take an enormous shock to its economic well-being, and it would be damaged very seriously. I want to make the point that the United States can actually, because of its size, can be relatively effective if it were to pursue a less open policy with respect to the rest of the world. America would not be desperately impoverished if it raised tariffs to 25%. The transition would be brutal, there would be, I think there would be a serious recession, but when things settle down and markets recalibrated and labor markets in particular and capital markets, and if it was thought to be for a long time, America would become more self-sufficient. Many industries would come back to America that had been sent abroad. Many of them would not be here at all, would not be to America at all, because they won't be worth it, they'll be too expensive. So the start of living in the United States would take a hit. There'd be less innovation, less competition, all that would come at a price. America would not be destroyed by an enormously less open trade policy the way other successful countries would be that became less open to trade. If, for example, in the aftermath of Brexit, England decided it would no longer not just follow the policies of the EU, the European Union, but would decide to create everything for itself to make itself richer, it would become much, much poorer, 'cause it's a small country relative to what it's open to now. It has many, many more people to trade with now and that it goes us for much more specialization, much more powerful, divisional labor, and a much higher standard of living than could be sustained if the people of the British Isles decided to make everything for themselves. They would be much poorer. There might be some advantages in terms of, I don't see it actually, you can make an argument that trade was pursued to aggressively, to try to go back, I don't think has the benefits that people have in mind, but I do want to concede and I want to see if you agree with me that if the United States, these tariffs stick and the United States stops trading with China because for whatever reason, it's decided that either for economic fairness or geopolitical advantage or whatever it is that the United States should not interact economically with China. The United States would take a hit, but it would be a still a prosperous country. China would take a huge hit, by the way, I think, and it would be very hard on them, which is, I think, the argument for some kind of leverage, but in my experience, when you knock people around, they don't always feel like compromise. So I'm not optimistic, this is going to end well, but we'll see, I'm agnostic about it, I will see. What are your thoughts on this, though, about the United States, kind of a special case in a certain dimension? Absolutely. So we already talked about how it's a special case in terms of its currency, but you're absolutely right in terms of economic size. We are a continental-sized nation. We are diversified. We have a huge amount of agriculture. Huge, still a lot about manufacturing. We talk about how we've hollowed out, but we still produce a lot of manufactured goods. Obviously, we have a world premiere service sector in many cases. So we're very diversified. We're the world's largest economy. And you're right, if we turn inward, we take a hit, but it's not going to be disastrous. We have the resource to do reasonably well. But other smaller countries are, as Israel, Canada, a much more dependent on external trade. They can't produce a variety of products. And so they're much more open, they're much more dependent on trade. And they are the ones who are really going to suffer. I think if the U.S and other countries go down this route of closing down to trade, I don't expect to see a complete reversal of globalization and all the things we've seen. But once again, it's an attenuation. And there's going to be some harm as a result. But the U.S. is a special case because it is so large. You can't think of a small European country, a small Latin American country, a small Asian country that hasn't really done well because of openness and the variety and the cost and the efficiency of engaging in trade. It really depends on it. And those are the ones where the case for trade in some sense is easier to make to the population because you can sort of see it. Whereas the U.S. it's a harder case to make because once again, the cost are not going to be that apparent of closing markets. I'm going to give you one more close on this. Trying to give the arguments due, which as soon as I'm sure of notice, it's not my strong suit for this topic. But one of the stranger parts of this moment is that unemployment is 4%. If unemployment were 20%, the so-called shine to shock, which I think has been grossly overstated, the China joining the World Trade Organization in I think 2000 led to, I'd say, a slight increase in the pace at which manufacturing jobs left the United States. If you look at the trend of the proportion of manufacturing jobs as a proportion of total employment, it's almost a straight line down over to over the last 75 years. There's nothing enormously obvious about NAFTA passing or China joining the World Trade Organization. You can, looks like there's a little effect in terms of the steepness of that decline. Again, I think it exacerbated the decline that was already there a little bit from technology and innovation and the use of robots and so on. It doesn't mean it didn't have an effect. It didn't mean it didn't have a big effect in certain areas. Great, probably dead, but at the national level, I think it's greatly, greatly exaggerated. So because of trade with China, somehow the pace of it had been so intense that unemployment in the United States had risen to recession levels of 10% or more, 15%, 20% or a depression. You can understand, wow, we've got to preserve America's jobs. I can see a demand for some protectionism in that world. Here living in a world where unemployment is basically zero and yet the body politic and the public at large has come to believe, I think incorrectly, but has come to believe that somehow the United States, the wealthiest nation in the history of the world, has been exploited by its trading partners, which is incomprehensible to me. There are things that are unfair in the world and in the world of trade, but the United States is the victim of this is very strange to me. And yet, it's clear politically that Trump has given a voice to a large, not small, a significant portion of the American electorate and the body politic that sees that something has gone wrong. Now, I think they're looking at the wrong culprit. They're seeing trade and Chinese trade, just to be Mexican trade and NAFTA or Japanese trade in the '80s as somebody to blame. I think that's a complete error, but it's pretty clear that a lot of people think that Trump's onto something here. So now I'm going to put your political science hat on which you don't have. Well, you are an historian of trade policy over time. How does that make, what do you think about that? That this justification and this mood in the country that somehow trade has been a source of pain and economic disruption? First of all, I agree with your premise that it's an unusual time for trade to be on the agenda when the unemployment rate is very low. The economy's been sort of humming along and you wouldn't have expected that. So you remember the early 1980s as I do when we were the deepest recession since the Great Depression, those vulgar disinflation imports were coming in from Japan and elsewhere, the dollar was very strong. A lot of protection is pressure back in those days and you could understand that. But what's going on today? Well, here's where I'll disagree with you a little bit in terms of the public mood. Now, certainly there's one person in the executive branch who believes strongly that trades a big problem for the US. But if you look at public opinion polling on trade in the US about whether it's an opportunity or a threat, it's swung much more towards opportunity. If you look at the popularity of the tariffs, they're not very popular, particularly against Canada and Mexico. Yes, there's some support for tariffs against China because China's sort of a bad actor on many dimensions. But should we be hitting our allies with tariffs, that's not a popular policy. There's not a lot of widespread support for that. So I do think that, and once again, you mentioned earlier on about Milton Friedman and the role of experience as an education process. If we go through with these tariffs, we're going to learn very quickly, I think, the new generation will learn. It's not going to solve the problem. It might actually compound certain problems in terms of the standard of living, cost of living, and things of that sort. So it's not a good solution. And maybe that'll carry us forward in a different way. So I'm a little bit more optimistic about the political mood in the U.S. is in terms of pushing back against this. But here's sort of a depressing and out historical analogy. So you mentioned, the economy's doing all right. Unemployment rate is 4%. Why are the complaints about trade? Well, guess what? In the spring of 1929, when the House of Representatives opened up hearings on the smooth-holly tariff or what was it going to become, the smooth-holly tariff, Stockmerk was doing well. Khan was humming long. Unemployment rate was very low. And they went forward with the tariff. And obviously, we hit the business cycle peak in the Stock Market crash in the fall of 1929. And things didn't unravel from there. But that was an initiative by Congress at that time to raise tariffs at a time when it didn't seem like there was any need. No industry was clamoring saying we're being beset by foreign competition that we're being overrun. We're losing all these jobs. The economy was doing pretty well. And yet, Congress said, yeah, let's try this thing with this tariff. And see if we can boost the economy up a little bit more. Enter not to be a tragic error. And unfortunately, I think we've had a pretty good economy until recently. A lot of indicators are looking not so great now. And tariffs may have something to do with that. I guess that has been Doug Irwin. Doug, thanks for being part of e-con talk. Thanks for having me at a pleasure. [MUSIC PLAYING] This is e-con talk, part of the Library of Economics and Liberty. For more e-con talk, go to e-contalk.org, where you can also comment on today's podcast and find links and readings related to today's conversation. The Sound Engineer for e-con talk is Rich Goyette. I'm your host, Russ Roberts. Thanks for listening. Talk to you on Monday. (upbeat music)