The Delegates Lounge
Join us in The Delegates Lounge, an independent podcast on world affairs based in New York City at the United Nations, the hub of global insights in plain sight. We hope you’ll come back often to listen in on some fascinating conversations hosted by J. Alex Tarquinio, a veteran journalist who writes essays for Foreign Policy from her office across the hallway from the UN Security Council chamber.
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The Delegates Lounge
The Trouble with Tariffs: Harvard Economist Jason Furman Weighs In
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In pursuit of economic understanding, we speak with Jason Furman, the Harvard economist who co-teaches the university’s core course in the discipline, “Principles of Economics,” Harvard’s most popular course.
The conversation tackles President Donald Trump's "Liberation Day" tariff announcement that sent markets nosediving, that is, until the president hit the pause button. The Harvard economist methodically dismantles the logic behind targeting countries with bilateral trade deficits, using unexpected examples like Madagascar’s vanilla bean exports and Lesotho's diamond exports to illustrate why the approach is fundamentally flawed. "We could eliminate our trade deficits with them," he explains, "and what would that mean? That would mean less vanilla beans and fewer diamonds."
Our wide-ranging discussion touched on Trump’s big, beautiful budget bill and Moody’s downgrade of its U.S. debt rating while, along the way, exploring the linkages between global trade, clean energy, and artificial intelligence. Jason, an economic adviser to President Barack Obama, offers a refreshingly clear-eyed assessment of both the Trump and Biden administration approaches to trade and manufacturing. Despite their different methods (tariffs versus subsidies), both administrations share a nostalgic vision of American manufacturing that doesn't align with today's economic reality.
Listeners are reminded of our guest's Foreign Affairs magazine article "The Post-Neoliberal Delusion" that critiqued Biden's signature economic legislation (see link below). Looking forward, his greatest economic worry is that "the tariffs come back with a vengeance," while his greatest hope lies in the potential of artificial intelligence to "raise productivity growth, raise wages, help with our deficit problems" if implemented thoughtfully.
Speakers:
J. Alex Tarquinio (host) is a resident correspondent at the United Nations in New York and co-founder of The Delegates Lounge podcast. @alextarquinio of @delegateslounge on X.
Jason Furman (guest) is the Aetna Professor of the Practice of Economic Policy jointly at Harvard Kennedy School and the Department of Economics at Harvard University. He is also nonresident senior fellow at the Peterson Institute for International Economics and a past U.S. presidential adviser. @jasonfurman of @Harvard and @PIIE on X.
References:
We mention a recent article by the guest in Foreign Affairs magazine so we’re providing the link below.
https://www.foreignaffairs.com/united-states/post-neoliberal-delusion
Credits:
Music: Adobe Stock
Illustration: Adobe Stock/UraiwanT
Headshot (in some formats): Jason Furman, Harvard University
Welcome to the Delegates Lounge . Pull up a chair . I'm Alex Tarquinio , a journalist based at the United Nations here in New York City and your emcee for this podcast featuring some of the most influential minds in the world today . Settle in for some riveting tete-a-tete , available wherever you listen to podcasts . Welcome back .
Speaker 1We have
Introduction to Jason Furman: Harvard Economist and Obama Adviser
Speaker 1a fascinating conversation for you today with Jason Furman , the Harvard economist who co-teaches the university's core course in the discipline Principles of Economics , harvard's most popular course . He is also a non-resident senior fellow at the Peterson Institute for International Economics and a former presidential advisor . Our wide-ranging discussion touched on President Donald Trump's big , beautiful budget bill and Moody's downgrade of its US debt rating , while along the way , exploring the linkages between global trade , clean energy and artificial intelligence . Naturally , much of our chat focused on Trump's tariff blitz , brought into stark public view on April 2nd , his so-called Liberation Day , when , standing in the White House Rose Garden , he held up a placard displaying unprecedented tariffs on countries both large and barely known . After the markets nosedived , trump walked back the sky-high tariffs on many countries for 90 days to allow them time to try to negotiate better deals . Jason has been actively explaining in his Harvard classes and online what he thinks about the Trump approach to trade . His views are mirrored in US public opinion polls , showing widespread skepticism .
Speaker 1Jason served eight years in the Obama administration , including as chairman of the Council on Economic Advisers , acting as both the president's chief economist and a cabinet member . But as an economist , jason critiques not just this administration . After playing a key role shaping the Obama administration's economic policies , which centered on free trade agreements the preferred policy of presidents from Bill Clinton to Barack Obama he watched Joe Biden take a different tack . In the March issue of Foreign Affairs magazine , jason argued that , for all the lofty talk behind policies that collectively became known as Bidenomics , they had contributed significantly to inflation . In some matters , such as national security or the environment , he asserted that certain gains might be worth some economic pain . With his article in mind , we discussed two signature legislative acts of the Biden administration the Chips and Science Act , aimed at incentivizing domestic semiconductor chip manufacture , and the Inflation Reduction Act , which , among other things , subsidized clean energy technology . As always whenever we mention an article in this podcast , we'll add that link to the show notes .
Speaker 1We spoke about Trump's big , beautiful bill the day before the House of Representatives burned the midnight oil to approve the federal budget bill by the narrowest of margins . This mammoth budget package championed by the president includes permanent extensions of his 2017 tax cuts , new tax breaks on tips and overtime , significant cuts to Medicaid and food stamps , and increased funding for border security and defense . Now it heads to the Senate , where it could face tougher Republican scrutiny over the trillions of dollars that it's expected to add to the federal debt . House Speaker Mike Johnson , ever the optimist , is hoping to have it on Trump's desk to sign by July 4th . Meanwhile , the 90-day pause on the Trump Liberation Day tariffs is set to expire after the American Independence holiday , so lawmakers will be drafting a budget without knowing what revenues from tariffs the federal government may come to depend on . Stay tuned to find out what Jason and I both learned from the Rose Garden speech . Here's our conversation . Here's our conversation , jason Furman . Welcome to the Delegates Lounge .
Speaker 2Great to be with you .
Speaker 1What struck
Biden and Trump Compared on Efforts to Revive U.S. Manufacturing
Speaker 1me about your recent article for Foreign Affairs that I thought was kind of a different take is that , while the approach may have been very different in the Biden and Trump administrations , there was some commonality of goals in that both wanted to revive manufacturing in the United States . Obviously , biden was pursuing it more with sweeteners , subsidies , tax credits , whereas Trump is more focused on tariffs . But is that how you saw it , that there was a similar goal between the two administrations ?
Speaker 2Yeah , I mean there are some very big differences in terms of magnitudes between the Trump and Biden administration . There are very big differences on fiscal policy . Do you want to raise taxes on the rich or cut taxes on the rich ? Do you want to expand health coverage or contract health coverage ? Skepticism about the way that the market allocates things ? Yes , on all of that there actually is a certain amount of continuity between the two .
Speaker 1Well , in fact , it feels almost as if both have a nostalgic vision of American manufacturing . Let's go back to the 1950s , when American workers made more things with their hands , rather than the preponderance of workers working in services now . And is that a reasonable goal ? Should Americans , you know , produce more of what they consume ? Or is there a logic to say that we've moved up the value chain and we should be doing more services ? I mean , in other words , where do you fall in that argument ?
Speaker 2I think , unless you have a well-defined reason , the market's going to figure out better what it is you're good at making . It's going to direct production towards things that have higher productivity , higher wages , that the United States has comparative advantage in , and for the most part , that is not manufacturing . There are lots of open manufacturing jobs in the United States today . There's not a lot of people that want to take those jobs , and that's because those jobs , first of all , don't really pay any more than other jobs . In fact , they pay less than a lot of other jobs in our economy and they can be rather unpleasant .
Speaker 2Now , I did have that caveat at the beginning that in general , unless there's a well-defined reason , the market knows where best to make jobs . So the well-defined reason for departing from that in my mind the most justifiable one is national security . So if you feel , for national security reasons , you need to do something in the United States , then we should do it here . We should be willing to pay more for it here and we shouldn't kid ourselves into thinking that in the process we're creating better middle class jobs . In fact , if anything , we might actually be creating worse jobs at a higher cost , but that might be worth it in order to achieve a different goal .
Speaker 1Is that
CHIPS Act: Security vs. Job Growth
Speaker 1how you saw , say , the CHIPS Act trying to get more chip production in the United States ?
Speaker 2Yes , I do not think the end result of the CHIPS Act is going to be better jobs in America . In fact , those factories are largely going to employ people with advanced degrees . That we're going to have no problem getting jobs , with or without . On the chips app , I don't think we're going to be making the best microchips in the world . They're still going to make better ones in Taiwan .
Speaker 2But I'm going to sleep a little bit better knowing that we have more of a domestic supply of microchips , even if they're a bit more expensive and not quite as good as the ones from Taiwan , because getting 90% of your advanced microchips all from one dangerous place is just not something we should be fully content with .
Speaker 1I mean a little bit about myself . I actually grew up in Silicon Valley , when Silicon Valley was growing up , so to speak , and I remember when many chips were made either in California or Colorado . I mean , how did we get to this point where Taiwan made most of the chips , and are there reasons why they're better , or they've just invested it and they have the know-how , the expertise now ?
Speaker 2I mean , making chips is not a super high value added activity . Memory chips are basically a commodity , which is to say they're sort of identical to each other , so they don't command a very high price and the companies that make them don't make a particularly large margin from them , and the companies that make them don't make a particularly large margin from them . Logic chips are less of a commodity , but still , you know Apple and Nvidia are , you know , much , much , much more valuable companies than TSMC . Or you know Foxconn , which assembles the phone , doesn't make the chips . So we're in the place in the division of labor that's just gotten much , much more divided . That labor and the separation of the design from the fabrication , All the different pieces that go into the fabrication are made around the world . The Netherlands , for example , makes a very key part of all of it , and so I think we're just in a world where it's division of labor and the more routine , you know , in some ways simpler , even though it's still incredibly , incredibly , incredibly complicated thing is happening overseas .
Speaker 1So it's the intellectual property , the designers , the chips , the basic technology that is more high value .
Impact of Tariffs on Trade Deficits and Imbalances, e.g., Madagascar and Lesotho
Speaker 1We don't know what's actually going to happen with the tariffs , as he talks about them both front and forward , taking advantage of the US . Some of this rhetoric seems to go beyond the goal of eliminating the US trade imbalance overall , but it actually seems aimed at eliminating a trade deficit on a bilateral basis and even goes after friends where we have a trade surplus , like the United Kingdom , achieving a zero trade deficit with each and every country . Is that a realistic goal and is it a desirable goal , or is this more of a psychological talking point ? It's not a realistic goal in terms of we can't accomplishment .
Speaker 2It's not a realistic goal . In terms of we can't accomplishment . It's not a reasonable goal in terms of we don't really want to accomplish it and you know , almost none of it makes any sense . So , first of all , bilateral trade deficits and trade surpluses often just reflect which country needs what from whom . We run a trade deficit with Madagascar and Lesotho , why ? Because Madagascar makes vanilla beans , lesotho makes diamonds , and they're both really poor countries , so they can't afford to buy very much from the United States . We could eliminate our trade deficits with them , and what would that mean ? That would mean less vanilla beans and fewer diamonds , and you know , one of the two I'm personally completely fine with , but I'm not going to impose my own prejudices on everyone else . So you know there's no tariff that's going to solve this problem .
Speaker 1Or coffee . I mean there's some things we I mean we have a little bit of Kona coffee in Hawaii , but we can't grow much coffee here . Lesotho had the highest quote unquote reciprocal tariff on that famous chart that Trump held up .
Speaker 2Yeah , it had the highest because and that illustrated what was wrong with that whole concept we have a trade deficit with Lesotho because they sell us diamonds . We want their diamonds . Do I want their diamonds ? No , but you know it's a free country . If people want to buy diamonds , they should be able to buy diamonds , including buy diamonds from Lesotho . Anyway , they buy a bunch of diamonds from Lesotho and all of a sudden Trump says they're taking advantage of us . We're going to do a 50% tariff and , by the way , even after that we're still going to have a trade deficit with Lesotho . It'll just mean the diamonds are more expensive . We're not going to be a richer country because we've tariffed some tiny little poor country on the other side of the world . We're not going to start making diamonds in the United States because of this tariff on Lesotho . I mean , no aspect of it makes sense and I'm not just picking , you know , I'm picking this one because it's a really clear case . But then you can reproduce it over and over and over again .
Speaker 2You know we have surplus with Brazil . We have a deficit with France . Why is that ? You know it has nothing to do with trade policy . Brazil actually is more protectionist than France is . We pay more tariffs to get into Brazil than into France , but we have things like natural gas that they really want and good ways of exporting that natural gas to them . France , we don't have as much capacity for the exports there . So there's some reason to worry about your trade balance overall , because it gets to the sustainability of can you afford , year after year , to run a trade deficit , but for any given country you don't really care that much . Moreover , it is not caused by their tariffs . Moreover , it is not solvable by tariffs .
Speaker 1Now , that last point is very interesting because we've been talking about Lesotho and I mean , I'm not even certain if some Americans would have known of the country Lesotho or been able to find it on a map before it . You know the Rose Garden speech last month . On the other hand , there has been a long running structural trade deficit with China
China's Unfair Trade Practices
Speaker 1and many Americans feel that China has unfair trade practices . Does the tariff approach make sense when addressing the trade deficit with China ?
Speaker 2Yeah , I should say . By the way , the one place in the world I learned about when we did the reciprocal tariffs was the Heard and McDonald Islands , which is the penguin islands that got a 10% tariff .
Speaker 2I confess I had never heard of them before but onto your more serious and important country , china I had heard of before the reciprocal tariff announcement . Our trade deficit with China is large . In dollar terms it's not that large relative to China's economy . They run a trade surplus . Overall that's a few percent of GDP . That's a totally reasonable , normal-sized trade balance for a country to run . The causes of it are less about protectionism . China has tariffs of about 5% on the United States . The United States has tariffs about 2% . Sorry , the numbers I gave you are before the first Trump administration's trade escalation , but prior to everything those were the tariffs about 2-5% .
Speaker 2The reason for the trade balance being the way it is is largely rooted in macroeconomics . In China people save a lot and a lot of the saving they don't even really choose to do . They never get the money in the first place from the companies which keep the money internally . And in the United States we , you know , effectively borrow a lot . We run a big budget deficit , for example . That requires us to get money from the rest of the world . We can only get that if we run a trade deficit with the rest of the world . So I think we do have a trade deficit with China .
Speaker 2You know that one might worry a little bit about . But trade , you know , tariffs and things like that aren't going to do a whole lot . What would do a whole lot is get it structurally . And by the way , when I say not do a whole lot , there'd be some rearranging of the debt charts . You know , something would come through Vietnam instead of through China . That's not that different economically , not even really very different geopolitically . But you know the labeling of this stuff . Hasn't that already begun ?
Speaker 1By the way , I'm one of those people that ran out and bought a new MacBook Pro because I was afraid that a price hike might be coming , and I think on the box it does say that it was assembled in Vietnam . I don't know if that would have been the case if I'd bought it , you know , a few months previously , in December . It might have come from China . So I think some of that deck chair factor is occurring . Presumably Apple had product sitting around in warehouses . Make the choices based on this 90-day pause , but that can't go on indefinitely .
Tariff Deals before 90 Day Pause and Role of Economic Advisors
Speaker 1That reminds me we're about , I think , almost exactly halfway through the 90-day pause in tariffs and we have been hearing that there's a sharp drop in import traffic at Long Beach , california . How soon might we see an impact on store shelves if they don't do some big , beautiful tariff deal ? Are we talking ? Could you start to see emptier shelves around the back-to-school period ? Would it be Christmas ? Because obviously there's some delay .
Speaker 2Yeah , so it just is . I mean , first of all , we don't know , because we haven't observed this type of thing happen before , and the stop start nature of it a lot of stuff is rushing into the country right now . Now it takes a while for ship to make its way across the ocean . You don't can't just turn the switch on and off and expect things to instantly change . But yes , between the pre stocking , people had already done the additional amount they're doing now . I would expect it's sort of you know , a fall winter type of issue to see , you know , shortages and or higher prices . Right now a lot of companies really are absorbing price increases so far . I was at a car dealership earlier today and they had signs get your car now , you know , before the tariffs start to show up in the prices , and they were explicitly marketing it that way and it , you know , made me feel maybe I should hurry up a bit to get my car .
Speaker 1Yeah , that's a reaction I had with a laptop . It's like , oh , you better act now If tariffs do go into effect in about six weeks time will inflation be in you ?
Speaker 2inflation be almost inevitable after that in China , the higher on certain sectors , some additional sectors that are coming with near certainty semiconductors , pharmaceuticals and the like . In terms of whether the additional so-called reciprocal tariffs come back , it's so hard to tell . I mean , we reached a deal with the UK . I mean that's a country that you know we have a trade surplus with , that is a very close friend and was willing to basically go along with something where they gave concessions to the United States in exchange for almost nothing . They still have the 10% tariff on them . That's just going to be a lot harder with other countries , countries that have trade deficits with the United States .
Speaker 2We have a less close relationship with that politically . Their leaders can't be seen as giving quite as much Europe . For example , they basically want a deal where the United States would lower tariffs from the pre-reciprocal in exchange for Europe lowering them . The idea that we're going to just call off some additional tariffs in exchange for concess them , the idea that we're going to just call off some additional tariffs in exchange for concessions from them and keep the 10% tariff , is just politically and economically very unappealing to the Europeans the Japanese also , I mean . I was involved from the sidelines in the TPP negotiation .
Speaker 1This was during your time in the administration . Yeah , during the sidelines in the TPP negotiation .
Speaker 2This is during your time in the administration , yeah , during the Obama administration and politically , you know , things like agriculture are really , really , really hard with Japan , because their farmers can be really , really , really powerful .
Speaker 1Well , rice farming , I mean . Obviously there's an economic and a food reason for it , but I think it's also such a huge part of the culture . I've heard that rice farmers in Japan are just very revered and you know if they , if they have a concern , the government has to listen .
Speaker 2Yeah , Now , eventually we made some headway and got more ability to export rice to Japan . Export rice to Japan and I mean we didn't didn't happen because we pulled out of TPP , but we got a deal that would have enabled that . But we also gave things in exchange for that and it took a long , long time . So the idea that this is going to be settled quickly and without any sort of ability to save face or achieve other goals on the part of the Japanese from the beginning struck me as implausible , and that appears to be how it's playing out .
Speaker 1Yeah , I mean , obviously there were a lot of differences from your time in the Obama administration on the National Economic Council and Council of Economic Advisors . But what are some of the key differences in the messaging ? I mean , is that something that the Council of Economic Advisors do ? You only talk as an economist or do you say , oh no , look , you need to explain it this way to voters so they understand the economics of it .
Speaker 2Yeah , so I mean I've worked at both the National Economic Council and the Council of Economic Advisors .
Speaker 3In the Obama administration In the Obama administration .
Speaker 2Actually I worked for both of them at a lower level in the Clinton administration as well . The National Economic Council is more coordinating economic policymaking , it's more strategic and it definitely incorporates much more message politics . Working with the different units in the White House , the Council of Economic Advisors it's not like some pure academic think tank . If you want to be a pure academic you should stay in a university . It gets its hands a bit messy at times but is much , much closer to saying you know , here's what economics thinks , here's what is a credible argument and serious argument . You know , this is why you know we think that's a less than credible and less than serious argument .
Tariffs as Income Tax and Moody's Downgrade, Recession Predictions
Speaker 1Now the goal of the tariffs . Obviously this has been shifting , as we said , trump first floated the idea as the primary goal was a reindustrialization , as we talked about , but he's also said it's an alternative to the income tax . He talked about that in the Rose Garden and then , when the markets had an increasingly negative reaction in the first week , he announced the 90-day pause and since then he's been talking about it as a negotiating strategy . Obviously , both can't be true . If it's a strategy and they're going to go away or be reduced , then it can't be counted on as a long-term revenue stream for the government to eliminate the income tax . So how much of that should Congress be factoring into their talks right now about the budget ? Trump's quote unquote one big , beautiful bill .
Speaker 2I think it's a real mistake to count on tariff revenue to offset the so-called one big beautiful bill . First of all , even the existing tariff levels are not sufficient to offset the cost of the tax cuts in that legislation . Moreover , that legislation is 10-year legislation . It's de facto permanent legislation because it's setting up a process that would make it very hard to let those things go away . And these tariffs are hopefully not permanent . My hope is that Donald Trump ends them . If he doesn't end them , I expect the next president to . So the tariffs to me feel fragile and temporary . The tax measures in that bill are permanent . You shouldn't use one to pay for the other and , by the way , the numbers don't even add up , even if you ignore the concerns that I just expressed .
Speaker 1Tax measures , particularly big tax cuts , have always been announced in , I think , 10-year increments and of course that hides the actual long-term cost and obviously much of what we're talking about that one big beautiful bill is actually a continuation of the initial tax cuts from Trump's first term . But in that case , well , he did have tariffs in his first term , not as big .
Speaker 2Much smaller . The tariffs this time around are much , much more extensive .
Speaker 1I don't remember them being billed in the first term as a way to offset the tax cuts .
Speaker 2No , they weren't , because they didn't come close to it . And , by the way , I mean it's not . I don't mind using 10-year budget numbers , that's sort of standard . The issue here is a number of the different tax policies , like tax-free tips , tax-free overtime , tax-free social security benefits . They just last for four years in the law , and so if you look , the cost of the law in the fourth year is really high and then it goes down a lot . Now if you think it goes down a lot , great , you know , we didn't raise the deficit over the long term . There's not a single person voting for this legislation today who's not going to be actively pushing to continue it four years from now . In fact , they're going to argue it's a tax increase if any of that goes away , and so this is really just a gimmick to disguise the true tenure cost of this legislation by pretending that some of it will actually go away . Of course it won't .
Speaker 1So it camouflages the long-term cost of those tax cuts , but when they come up for renewal it's always billed as oh my gosh , that would be a huge tax increase , making it very difficult not to perpetuate them . How much did this factor into Moody's decision to downgrade US debt ? Do you think the tariffs were a factor in that ? Were they also looking at the potential for the one big beautiful bill , or is that just looking at current debt level and deficit ?
Speaker 2And after the Moody's decision , I'm worried and not panicked about our debt , and my worry level has not changed one iota . There's nothing I learned from them . There's nothing they know about our fiscal situation that you couldn't figure out for yourself already from looking at the Congressional Budget Office . But you know , these things can always be a reminder and a focal point for discussion . Reminder and a focal point for discussion . And what's notable is the two previous downgrades from S&P and Fitch were , in part , about the dysfunction of divided government . The S&P one in 2011 was when we went to the brink on the debt limit and , while they warned about the magnitude of the debt , they spent a lot of time really talking about political dysfunction in Washington , causing some type of accident .
Speaker 2The Moody's downgrade is about unified Republican control doing too much in the way of tax cuts and too much in the way of deficit and debt increases . And so when I was sitting in the White House in 2011 , an S&P said you know , the problem is your country is dysfunctional . I didn't totally disagree Now , I wouldn't have lowered our credit ratings for it but they were sort of onto something . Moreover , I didn't know what to do about it . I mean , we were trying to be functional , felt like the Congress was the dysfunctional one . To us , here is a very simple thing to do . I mean , if the president wants to veto this legislation or call it off , we will have a smaller deficit , we will have less of a fiscal problem . So this is very much a choice that President Trump and the Republican Party are making and Moody's is basically warning about and rebuking .
Speaker 1It sounds like what you're saying is Moody's was maybe a little bit late to the party in this downgrade .
Speaker 2I mean , I still think of the United States as AAA . I really do .
Speaker 1Despite the debt .
Speaker 2Yeah , we'll be good for the money . We'll pay people back . They can treat our debt . It's super liquid . It's super safe .
Speaker 1And it is a comparison . There are a few other countries that have the bond markets . We do that have the confidence of investors . That being said , was this something in the S&P decision when you were in the administration ? Is this something that you would have to go , I guess , explain to the boss in the Oval Office ? And do you think they're having to do that now with the Moody's decision ?
Speaker 2There's a big run up to the S&P decision . I remember I did one meeting with them to talk through our fiscal situation where it stood , where we were going with it , and a lot of our argument to them was our credibility . The people in the room making this argument many of them , including myself , had worked in the Clinton administration , had been involved in balancing the budget for the first time in a generation and said you know , we care about this stuff , We've done it before , We'll . You know we'll do it again . We don't need to balance the budget , by the way , but get the debt down as a share of GDP , and that is a problem with this administration .
Speaker 2Now the Treasury Secretary talks a good game about cutting the deficit to 3% of GDP . That's a great goal to have for the deficit , but most of the actions go the other way . They're hurting the economic growth that would bring the deficit down . They're raising the interest rates that are very important for the dynamics of the debt , and they're raising the so-called primary deficit , the deficit excluding interest . So all three of the things they're doing are going in the wrong direction on bringing the debt down .
Speaker 1Does this White House care more about the bond markets than the stock markets ? I mean , they did react to the stock market a week after Liberation Day by saying they'd have a 90-day pause . But of course there's the famous Carville quote about wanting to be reincarnated as the bond markets .
Speaker 2Yeah , I mean this administration sometimes seems to care about bond markets , sometimes cares about stock markets , sometimes doesn't care about either . There's not like an exact formula or reaction function that seems to explain their behavior . I tend to think that a lot of it comes down to mortgage rates . I mean the 10-year treasury is it 4.7 or 4.1 ? That's pretty different in terms of the dynamics of the debt , but you still have multi-trillion dollar deficits either way . But consumers are very sensitive to what mortgage rates are . They really do care , and so that is an area where I could see it being a pain point , but it will take some time for it to build .
Speaker 1Well , in fact I know Trump wants Powell to lower interest rates . I guess what president doesn't they always do ? He did give some reassurance that he would not get rid of Powell , but do you have any concerns about the Federal Reserve or his treatment of the Fed ?
Speaker 2Well , look , his treatment of the Fed is appalling . How consequential is it for the economy ? I'm not sure . I mean it's a negative . Is it a small negative or a large negative ? Either way , why do it ? Why hurt the economy ? I think , ultimately he probably will not try to fire Powell , because what's the point ? His term ends in a year and , by the way , you get to blame him for all the economic problems . I mean not fairly , but you can still do it . It's a free country . You can blame whoever you want and you know , whereas if he picked his own person , he would own all of it himself .
Speaker 1So Powell is his own person in a way , right , it's just that he's distanced himself .
Speaker 2Yes , he's distanced himself quite a lot from him .
Speaker 1Now , of course , the Fed has to look at both inflation and economic growth . I mean , we did have a contraction in the first quarter . Do you think we might be entering a recession ? It's still obviously recession . You look at that in hindsight , but do you feel that the economy is moving that way now ? And also , if we have an uptick in inflation from tariffs , could we be looking at stagflation ?
Speaker 2Yeah , so we had a reported decline in GDP in the first quarter . I'm not sure that those numbers were correct . They're trying their hardest , I'm not . It's not a conspiracy on the part of the statistical agencies , but when there's just massive , almost unprecedented shifts in the data , it's a hard thing to track . And so they might have correctly counted all the imports showing up in the country but then missed some of the places . They ended up going like inventories and the like , so they entered them in one part of the GDP accounts as a negative , didn't do the corresponding positive entry in another part of the GDP accounts and ended up with too low a number .
Speaker 2And so I'll be looking to other measures of growth in the first quarter gross domestic income when we get that , and I'll also be looking to future revisions . So if you look at the totality of the data , the economy looked quite robust in the first quarter . The current tariff levels that we have should not be enough to tip you into recession , but you never know . What would is a big increase in uncertainty and a big return to a much larger and constantly changing set of reciprocal tariffs .
Speaker 1So you don't believe we're in a recession and in fact you think the economy may have grown in the first quarter and we should explain for listeners . It's not a deep state theory .
Speaker 2It's . In fact they're often Are . They almost always have data on more than half of the economy , so they're basically making an educated guess about what was going on in the half of the economy . They don't measure . Over time they get more and more of those measures come in , better measures come in , and often the number changes by even one or two percentage points . That's why , to understand the economy in real time , you don't want to just take one number , you want to look at lots of different measures and sort of average them in your head . And almost every other measure we have other than GDP was quite strong in the first quarter of this year .
Speaker 1That's a good point . So you'll be looking for adjustments there , and those can come three months later , six months later .
Speaker 2Three years later , six years later , they keep changing .
Speaker 1Way down yeah .
Speaker 2And we saw this look in the first half of 2022 , there were two negative quarters . One of them I think it was Q1 , has since been revised to positive , and so this thing that people said was technically a recession because of two negative quarters well , it's not technically a recession anymore .
Speaker 1So one of our recessions is no longer technically a recession because of these revisions .
Speaker 2Almost all economists at the time said this isn't a recession . You know , this is in the first half of 2022 . Oh , and almost every economist at the time said don't worry , this is not a recession . Here's like 20 different data points . 18 of them are going up . These data get revised a lot , et cetera , et cetera , and you know that view has been vindicated by the revision since then .
Speaker 1Now , what is more important in determining a recession ?
Speaker 2And the people who decide on recessions are looking very carefully at actual economic activity . How much is being produced , how much is being purchased , how much income do people have ? They're not looking at financial markets and they sort of take all that together and weigh the call .
Speaker 2But , by the way , we've now talked for a while about recession . Wouldn't it be too hung up on a recession ? If you lower growth from 2% to 0.5 , that's nota recession , but that's still a pretty bad thing to do . If you permanently lower the level of GDP by half a point , even so , every year , it's half a point lower than it used to be . That's a really bad thing to do also , and so there's a lot of ways to harm the economy that won't show up as a recession , let alone as a major crisis . But are you know , taking thousands of dollars away from people year in and year out ?
Speaker 1That's a bad thing to do , and it would also make the federal debt appear larger as a percentage of the economy . That is true , yeah , and also the strength of the dollar . I mean obviously still very strong now , but that's something that China and other BRICS countries have . I mean , I guess you could say that's been one of their hopes is that the dollar would be less dominant . De-dollarization . We're not seeing that now , but if tariff barriers continue to grow , could that potentially affect the strength of the dollar ?
Speaker 2It could . I think the dollar is . I'm pretty bullish about the dollar being used around the world . It's also not absolutely critical that it's used around the world . You can have a fantastic economy without your currency being the world's reserve currency . But you know , all else equal . I'd rather keep it and I expect that our country will still keep it .
Inflation Reduction Act: Clean Energy vs. Security
Speaker 1With the Inflation Reduction Act . It is science and technology , but it has to do with decarbonization and also energy sources of the future , or what we hope will be future , which have been overwhelmingly made in China . Now I mean wind turbines , solar energy . There again , I remember when those industries were starting out in Northern California tail end of the last century , and we've gotten to the point where now they're mostly made in China . So is that another case where we are paying more for products and we are subsidizing them through the Inflation Reduction Act simply to get manufacturing here ?
Speaker 2So I would distinguish between two aspects of the Inflation Reduction Act that are very different , two aspects of the Inflation Reduction Act that are very different . One is how do you make your electricity , and the Inflation Reduction Act gives you subsidies if you want to make your electricity using the sun or using wind or something like that . To me , that is unambiguously a good thing . Now I wish we had a carbon tax that penalized dirty energy , but we don't have a carbon tax , and so we might as well have a subsidy for clean energy . There's a very clear what an economist would call externality , related essentially to using clean power , so that part of it I'm 100% for , and it's very straightforward the rationale for it .
Speaker 1Is that an easier sell given the political climate here ? Obviously Europe . Carbon taxes exist there and they're more popular , I think , with the populace , with the voters . At least , they haven't , to my knowledge , kicked politicians out because they supported carbon taxes .
Speaker 2Yeah , it's interesting . In Europe they started with a carbon tax and they don't call it a carbon taxes . Yeah , it's interesting . In Europe they started with a carbon tax and they don't call it a carbon tax . They call it the emissions trading system , ets . They originally started with it with a de facto price of about five or ten dollars a ton . Now they're up to about 80 or 90 dollars a ton , I mean . So they scaled it quite a lot . So they basically said we're going to start small , start sort of pathetic . So when it started it basically didn't matter at all , and then it was like they boiled a frog by making it a little bit more year after year and turning it into something meaningful .
Speaker 2I wish we had done that in the United States . I don't think politically it could have been done . So I do not at all fault the Biden administration for not doing that , because they did what they could . So they subsidize the production of electricity with wind and solar Unambiguously good , pretty straight economics . There's then a separate thing , which is subsidizing the production of solar panels and the production of wind turbines the production of solar panels and the production of wind turbines .
Speaker 2Now , that's less clear because it's all of a sudden , just like you know , any other piece of equipment we have in the United States . You know why don't we want to import , you know , whatever factory equipment we use in the United States , from whoever makes it cheapest and best , rather than trying to make it ourselves it cheapest and best , rather than trying to make it ourselves . What's different about equipment in this sector versus any other ? I tend to be in favor of just importing the wind and solar from anywhere in the world . The argument for it which I don't think is crazy , even though it hasn't persuaded me , but it's possible is that China has just such dominance that , once again , we have to worry about the resilience , we have to worry about what happens in the event of a conflict with China , and we need to build the capacity to make that type of technology and equipment ourselves .
Speaker 1Well , in fact , in the event of a conflict with China over Taiwan or in the South China Sea , I mean , right now , solar and wind are not a large part of our grid , but if they were a larger part , I mean you could see where it might be difficult getting replacement parts , for example from Chinese companies . Is that a concern ? And then does it become a security factor companies ? Is that a concern ?
Speaker 2And then does it become a security factor ? That's a theory and that's not at all a crazy theory . You know it's different from oil . You know oil , especially back when we were big importers , when we didn't make very much of it . Every single day we needed tens of millions of barrels of oil , and if it got shut off , yeah , we had a bit in inventory , but very quickly we'd run through our inventories and we would just everything would grind to a halt . With a solar panel . It's not like China can shut off the sun in the event of a conflict , and so you still have the solar panels . Now they don't last forever . They depreciate , but it's a slower process , one that gives you more time to replace them , to figure out alternatives . The other thing I'd say is that approaches like the Inflation Reduction Act are about doing it in America , not about making sure it's happening in one of our friends one of our friends and so that's very interesting , because the didn't the Europeans object ?
Speaker 1I remember during Biden's first state visit with French President Emmanuel Macron , some of his team were complaining about the Inflation Reduction Act . They were talking almost how Americans talk about the Chinese , sometimes with unfair trade practices . So did it concern some of our friends ?
Speaker 2Yes , exactly so that you saw that , especially in areas like batteries , where all of a sudden we weren't giving tax credits to cars that bought their batteries from Europe , and you know , the European batteries would be cheaper . By the way , the American car industry is in better shape if we can get parts from wherever they're cheapest rather than trying to make everything themselves . And there's no national security concern whatsoever when it comes to French made batteries . And if anything from a national security perspective , it actually alienated a set of countries , of countries . So the manufacturing in the United States is in some well-defined places vis-a-vis China might make sense .
Speaker 2Outside of that , if we're trying to move stuff from France to the United States , we're creating worse jobs , more expensive cars , more carbon emissions , because there'll be less of all of it , and we're upsetting people in the process . There's not a very good reason to do that Now . France , of course , has no objection to us changing the way we make our electricity . We want to make electricity from wind instead of from coal . That's totally fine with France . In fact , they're happy about that . That's very much a domestic decision . But this we need to shift things from the entire world to the United States is a much less compelling economic argument .
Speaker 1Yeah , in fact , the French had a very typically French reaction . It was kind of like , well , we've been wanting the Americans to do something about global warming , but not this .
Speaker 2Yeah , oh , look , there's an issue . I mean , much of the world is dealing with carbon by raising the price of dirty energy . The United States is dealing with it by lowering the price of clean energy , and those two systems don't play super well together , you know . It gives the United States an export advantage . For example , it can disadvantage other countries in terms of their competitiveness globally , and other countries are also a little bit jealous . They don't feel they have the borrowing resources that the United States has to just put this huge amount of money into the subsidy system .
Speaker 2So yeah , there was a certain irony . Everyone was telling the United States do more , do more , do more . And then it was like , well , don't do exactly that that you're doing . And much of what we were doing I think we had no political choice and up or down vote . I'm in favor of it Some of what we were doing , some of the bi-American aspects , probably were a . Some of what we were doing , some of the buy American aspects probably were a mistake and , by the way , I think the Biden administration agrees with that last point . I mean , they tried to reinterpret the legislative language around things like the source of batteries in a way that would be more flexible in terms of accommodating imports from abroad .
Speaker 1What's the biggest new
The AI Difference, Fear and Hope for the Future
Speaker 1unknown factor artificial intelligence , agi that could if it lives up to expectations that could , really rewrite a lot of these economic rules . Is that correct ?
Speaker 2Absolutely yes . Ai is the biggest source of uncertainty in the economy and , to be clear , it's uncertainty that's good . I mean , uncertainty for an economist isn't the chance that something bad happens . It's the chance that something different happens , and something very different could happen , as a result of AI , and I'm I'm pretty excited about it . I think this government's actually doing a perfectly decent job of encouraging it , and it could mean great things for all of us .
Speaker 1Is the most important thing economically to have your country a leader in AI , or is it just the benefits that AI can bring ? I mean , because , of course , a lot of our listeners are outside of the United States Is it the benefits they can bring to all countries that have access to AI in terms of changes in medical care , in how goods and services are delivered , and just increasing productivity ?
Speaker 2I think the benefits are largely spillover to the entire world . I don't see this as a zero sum . It's a technology that everyone can use . It's , by the way , technology where people can learn from each other . Deepseq was in China . They published their papers . We learned from that . It's making our AI better . Now , if you own stock in one of the companies that's successful , it helps you . But , by the way , that stock is owned by investors around the world too . So , yeah , I think you should think of this less as a zero-sum conflict and more as a positive-sum .
Speaker 1you know , collective global exploration you know collective global exploration , but aren't there also security concerns around ? Some people working in AI , certainly in the US , would feel that it was important to have the strength of that industry here . When we talked about how we're importing wind turbines and solar panels from China , I think they want to keep the AI focused here . Is that right ?
Speaker 2Yeah , and you know , yes , I think there's security issues , but I wouldn't massively overstate them . I mean , the foundational models are becoming more and more like commodities . We can have a six month head start on China and the foundational models , but you know we're all converging to the same place and we're doing it pretty quickly and pretty synchronously . There's issues of how you apply and use the AI and build it into weapon systems and the like . That very much we want to do on our own . We don't want to share that knowledge with others . But a lot of the foundational models , but a lot of the foundational models yeah , we have no ability to keep that to ourselves .
Speaker 1Okay , I guess , sort of to wrap it all up , tie it with a bow . I mean , do you have a biggest economic concern right now ?
Speaker 2Is there something that is big enough to keep you awake at night ? I mean that the tariffs come back and that they come back with a vengeance , and that all of the happiness of the last few months , or the last few weeks , turns out to have been a mis-underestimation of Donald Trump's resolve to impose very , very large tariffs . That , to me , is my biggest fear . But my biggest hope is all the artificial intelligence we've been talking about , and I'm super excited about that and I think it may outlast any of the changes in this administration .
Speaker 1Among the other improvements it could make to medicine and communications , you think it could actually improve economic well-being overall .
Speaker 2Yeah , it could raise productivity growth , raise wages , help with our deficit problems , help with everything , if we do it right .
Speaker 1Do you think it'll be widely accessible , though ? I mean , obviously , Google just announced this very high price point for their new AI product .
Speaker 2Oh , it's going to get cheaper and cheaper . Ai product . It's going to get cheaper and cheaper . And you know , if you use the free versions of all of this right now , they're much better than anyone in the universe could have paid for even a year or two ago .
Speaker 1That makes sense , right , right . Well , thank you so much for joining us in the Delegates Lounge . This has been an enlightening conversation . We've covered a lot of ground and I believe our listeners will really benefit from it , especially those who are struggling to make sense out of some of the tariff news and the other news coming out of Washington these days . So thank you for making time for us .
Speaker 2Oh , thanks for the great discussion .
Speaker 3And that's it from the Delegates Lounge . We'd like to thank our esteemed guests , who've graciously allowed us to share their hard-earned insights into what really matters . And then there's you , our listeners , who we hope are sufficiently edified to clamour for more of the same . Do drop in for a weekly episode on Thursday , or from time to time if we're on the road , for special events , in which case there'll be a bonus episode . Subscribe wherever you listen to podcasts . Bonus episode Subscribe wherever you listen to podcasts . And if you like what you've heard , please take a moment to rate or review the show , as it helps others who share your abiding interest in world affairs to find their way to the Delegates Lounge . You can connect with us on many popular social media platforms or reach out to us directly at infothedelicatesloungecom . We're a small team so we can't respond to every message , but we will read them . Our show this week was written and produced by the host and by yours truly executive producer , frank Radford . Until next time , keep calm and curious .