Tariffs are in the air. Will they help or hurt Americans? Listen as economist Scott Sumner makes the case against tariffs and various other forms of government intervention that go by the name of industrial policy. Along the way he looks at some of the history of worrying about the economic and military dangers posed by foreign countries.
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| 0:37 | Intro. [Recording date: November 12, 2024.] Russ Roberts: Today is November 12th, 2024. My guest is economist Scott Sumner. His Substack is the Pursuit of Happiness. This is Scott's sixth appearance on the program. He was last here in April of 2015 talking about interest rates. Our topic for today is his essay on government intervention versus free markets, and industrial policy generally. The title, "What Economists Don't Know: Why Industrial Policy Will Disappoint." Scott, welcome back to EconTalk. Scott Sumner: Thanks for inviting me, Russ. It's good to be here. |
| 1:12 | Russ Roberts: What do you mean by 'industrial policy'? Scott Sumner: Well, that's an interesting question. It's not precisely defined. In some sense, almost any government policy could be viewed as an industrial policy, but the term is usually used for policies that are directed at changing, say, international trade flows or national security issues, environmental issues like global warming, and maybe regional economic problems. So, policies that are directed at reshaping the economy in a different way than a free market would produce to achieve some important national goal. I think that's usually how the term is used. Russ Roberts: And, you start off talking about a term I have to say I have a soft spot for: 'vulgar mercantilism'. What do you mean by 'vulgar mercantilism'? Scott Sumner: Well, I would define this as people who advocate generally protectionist trade policies for reasons that reflect a lack of understanding of basic trade theory. So, they often start out saying, 'Well, there's this Ricardian theory of comparative advantage that says free trade is best.' And then they say, 'But in the real world, this is wrong because of X, Y, and Z.' In fact, those arguments are not correct. X, Y and Z do not, in any way, refute Ricardian trade theory. And then they go on to advocate protectionist policies that they believe will solve certain problems like trade deficits, when in fact, typically, those policies will not solve problems like trade deficits, which are reflecting other macroeconomic variables like savings/investment imbalances, and so on. So, these are policies that are based on, in general, a misunderstanding of trade theory, I would say, and they've been refuted many times throughout history. I could point people to Paul Krugman's book, Pop Internationalism, which does a very effective job of refuting many of these mercantilist ideas. But they keep popping up again because they appeal to a lot of people's common sense, which is--the common sense view is imports hurt the economy. |
| 3:48 | Russ Roberts: I would just add that sometimes, trade advocates are criticized for being old-fashioned, not understanding the world has changed in modern times. We don't want to go back to the world of Adam Smith and Ricardo. Mercantilism precedes both of them. I think the earliest version that I've seen is in the 13th century, some time in the 1200s, might be the 14th century. And it's an argument that the accumulation of, say, gold or some monetary asset is a measure of a nation's wealth. And of course, Adam Smith said a lot of things in The Wealth of Nations, but one of them that he spends time on is why that is not the right way to think about well-being, and that monetary measures are not true wealth. It's really our ability to consume goods and services. But, as you say, it is a perennial favorite on common sense grounds that trade is not always good for a nation, that it could cost us jobs. Why do you think the economist's case is so unpersuasive to the average voter or advocate? Scott Sumner: Well, I think it's just one of many things in economics where the way the real world works is not consistent with people's common sense. I mean, we see this in other areas: the public view of price gouging, and many market phenomena. The public often has a common sense view of how things work that just isn't accurate. And, unfortunately, trade theory is very counterintuitive. You can see the direct effect of imports. They might be costing jobs in certain domestic industries that are competing with imports. But people aren't really looking at the big picture of what international trade is about. Every trade is two-sided. We're receiving something, we're giving something back. And, people aren't really thinking through the full implications of international trade. Interestingly, there's probably also sort of a little bit of natural xenophobia--that is, distrust of foreigners--involved, because typically trade within the United States, between states, is not viewed with the same sort of suspicion. So, if one state has a big trade surplus with another, the public doesn't really focus on that fact; and they don't tend to think in terms of, like, this state is stealing jobs from other states. Like, if that process is occurring, they would often just blame the state that's losing the jobs. Right? So, let me give you an example. Let's say that a lot of auto manufacturing jobs are going from Michigan to Tennessee or Alabama. A lot of Americans might just blame Michigan for not having a good business environment, right? Russ Roberts: Yeah. Scott Sumner: But, when it's a different country, there's a sort of natural incentive to view foreigners with more suspicion. And, I even think it depends on what kind of foreigner. Russ Roberts: Oh, yeah. For sure. Scott Sumner: So, there could be even a little bit of cultural bias. There might be more suspicion about imports from Japan than Canada, of cars, let's say. Russ Roberts: No, I think that's-- Scott Sumner: For cultural reasons or something like that. Russ Roberts: I think that's true. |
| 7:52 | Russ Roberts: I think the hard part is that in modern times, meaning the last few years--because what 'modern times' means: like, the last six months--common sense has been vindicated in many settings for many people. And so, I think when some listeners hear you saying that economists understand things that everyday people's common sense says is otherwise, their natural thought might be, 'Well, maybe economists are wrong.' And it's a good starting place. You should be skeptical of experts in any field. It would be wrong to use your common sense to figure out whether the world is flat. At least if you're looking out the window, the world looks flat. So, common sense is: flat. Now if you go a little farther to the seaside, seashore, you might start to get a hint that it's not as flat as it might be because you can see some of the curvature of the earth, maybe, with the ocean. But, I think in the case of economics, it's a complicated issue, and so your common sense can easily lead you astray. You forget to think about the role that exports play. You forget to think about the fact that you can't have imports without exports. You forget about the fact that there are trade flows in goods, but also in assets and capital. And, running a trade deficit means running a capital account--almost always--a capital account surplus. The words 'surplus' and 'deficit' have all kinds of emotional senses to them, which are not really accurate. And, the other thing I think that's hardest for people to notice is that if you don't allow imports, you don't have as much competition, and many of the things that you produce for yourself will be much more expensive than they otherwise would be; and you won't notice that. You'll see the expansion in the domestic industries you've protected. You won't notice that you're poor because your cost of living and your standard of living have been harmed by the keeping out of foreign goods. And, you don't see the new businesses that get started because of the resource savings you have because you produce things more effectively and efficiently if you allow competition from abroad. So, I think I'm pretty confident that the economists' story in general is correct. I think it's hard. I think you can make that case with logic; I just did my own 90-second version of it. But, I think a lot of people would want to also find some kind of empirical evidence for this. And they tend, as you point out in your article, to point to--they cherry-pick certain countries and say, 'Well, they're doing well. They're not so free trade,' or, 'They're doing not so well and they are free trade.' And, you make the observation, which I think is a challenge to any thinking person on these topics, which is: every nation does some of this, the protecting of imports. They do some kind of industrial policy. They do some kind of favoring of certain industries. They do some kind of regional subsidies to help places they think are struggling in a otherwise free market system. So, that makes it much harder to do the kind of empirical work that you might want to do. But that doesn't stop people. So, talk about how it's often misleading to just look at the world around you that way. Scott Sumner: Sure. I could give many examples. And a lot of these relate to people not really understanding the stylized facts or having a misleading notion of the data, basically. So, let me give you a few examples. South Korea is often cited as a sort of mercantilist success story for encouraging exports and supposedly discouraging imports. And yet, South Korea ran a trade deficit almost every year from 1960 to 1997. Those were South Korea's high-growth years, their double digit growth years. Most people don't know that. Russ Roberts: Yeah. Right. I didn't know. Scott Sumner: Another thing that's often cited--as you say, people will say, 'This country is doing well and they have a trade surplus.' But they're almost always doing less well than the United States. So, why should we copy countries that are lower in per capita GDP [Gross Domestic Product] than the United States? You also get, I think, a lack of understanding of the data with the effect of trade on unemployment. So, people talk about loss of jobs in manufacturing, mining, and so on; but in a lot of cases, the job loss has been mostly due to either technology or regional shifts. I'll give you a couple of examples. People cite West Virginia as a victim of neoliberalism. Right? The blue collar workers in West Virginia are really suffering. And yet, if you look at West Virginia, their major industry is coal mining. Well, the United States exports coal. Without trade, we'd be worse off in coal mining. So, why have so many jobs been lost in West Virginia? Well, it turns out that it's a combination of rapid improvements in productivity--so we can produce coal with many fewer workers; and also somewhat of a shift in coal mining to Western states where they do strip mining. Another example is Michigan. We've lost jobs in the auto industry in Michigan. But again, a lot of those jobs have been lost for two reasons. There has been a big increase in new automobile factories in southern states, and even Indiana, below Michigan; and we've also had major improvements in productivity in the auto industry. So, we still build a lot of cars in the United States, but far fewer in Michigan. And yet, the perception of the public is Michigan has lost out because of international trade. So, I would argue even without international trade, the improvement in productivity in auto manufacturing and the big shift in auto factories to the south would have cost a lot of jobs in any case. It's primarily a regional problem, not an international trade problem. So, there's just many examples where people--sort of lazy thinking about the issue. The easiest thing to latch onto is international trade. This is what people complain about. But, manufacturing jobs are being lost all around the world, and it's mostly due to automation. Russ Roberts: Well, I thought they were being stolen by Mars because we have a trade deficit with Mars. But--that's a joke. |
| 14:58 | Russ Roberts: Bu, I think it's important to point out--and I have an essay on this called "The Human Side of Trade"; we'll link to it--trade and productivity changes per trade[?portrayed?] or innovation are really fundamentally the same phenomenon. And, you mentioned it in passing, which is: There are just two different ways to get more from less. There are two different ways to expand your output and reduce your costs of production. And that's the only way you get wealthy as a country. You can get wealthy as an individual by, as Walter Williams liked to say, by banging your neighbor on the head, taking his stuff. You can get wealthier that way, but your neighbor is poorer. That's a zero-sum game. If you want a non-zero-sum game where everyone gets wealthier, you need to find ways to get more from less. Either you need to find ways to get more output with fewer inputs. Innovation--everybody understands innovation does that. That's what productivity increases do. That's what a new manufacturing process does. That's what an invention does. That's what a new industrial process can do. Trade is exactly the same. Trading with someone to produce something by swapping--building something and swapping it--for that product being produced abroad only makes sense to do it with someone from abroad if it's cheaper than doing it at home. And that is why--so what happens in your domestic economy doesn't mean you import 100% of what you need, but the mix of imports--excuse me, the mix of domestic production--versus farm production adjusts because it could be very expensive if we had to produce all our cars here or other products that we import. It doesn't mean we produce zero, but the mix adjusts. Because otherwise, it would be inefficient--unattractive, would be a better way to say it--to produce the whole thing at home in the domestic economy. Scott Sumner: The argument against international trade is exactly the same as the argument against automation. So, the fact that many Americans are opposed to international trade, but support technological progress, to me indicates they don't understand the issue. Because they obviously see these as two different-- Russ Roberts: They do-- Scott Sumner: issues. And yet they're both sort of destroying jobs to create a greater prosperity in much the same way as you say. So, yeah: I think there's a real lack of understanding of the issue. And I know that, probably to some listeners, sounds condescending. But, you know, the evidence is pretty overwhelming that countries that are open to trade do better than those that are less open. And, I would say there's also kind of a lot of excessive pessimism about the situation in the United States. The British magazine The Economist just had a cover saying, 'The United States is the envy of the world.' And you have these other economies that are really struggling, like, you know, Germany, let's say. Well, Germany has a huge trade surplus. So, if trade was really the problem, why isn't Germany the envy of the world, not the United States, in terms of economic performance? |
| 18:29 | Russ Roberts: Having said all that, there is an issue that I don't want to sweep under the rug--I don't think you do either--which is that, you know, it depends how effectively your labor market works--and your capital markets--for the readjustments that both trade and technological change cause and how long it takes for them to happen, and how much suffering or how intense that suffering is as an economy adjusts to change. So, when an economy--when there's innovation, technological progress, new techniques--people lose their jobs. Farmers used to be--3% of America is on the farm, a little less than that today. In 1900, I think it was 40%. All those jobs were lost. But people found other jobs. And they found them fairly quickly; and it wasn't a great suffering. And, there were cases that were tragically difficult at various points in American history in response to the improvements in technology and agricultural work. But in general--and this is the way I like to think about it--the people who owned farms in 1900 are not sad about the financial and material well-being of their great-grandchildren a century-plus later, because they can see that they did fine. That the unemployment is not 37% because agricultural went from 40 to 3. There were new things that came along. And those new things weren't coincidental in coming along. They came along because we didn't have to devote 40% of America's labor and human resources to growing food. And, that's glorious. It's not a bad thing. It's a glorious thing. And if we were able to import food--effectively America doesn't import much food, but if it did--as long as they weren't your enemies--and we won't be talking about the national security issues--importing food is just another way to get food without having to have 40% of your people on the farm. And so, that's in a system that works pretty--America's labor market is phenomenally quick to adjust relative to others, say, Europe. So, when you do have economic change, either due to trade or to innovation, it could be, if it doesn't work well--if your labor market doesn't respond very quickly or fluidly--that transition can be quite challenging for some people. And the reason I think Americans are tolerant of technological improvements and skeptical about trade is they don't realize they're the same; and they accept the technological change, because they see, 'Wow, there's a cornucopia of great abundance,' because of all these changes. They can see that televisions--take one example--are incredibly cheaper than they were because people figured out better ways to do it. And so on and so on. So then the punchline of that is: If it's slow to adjust, even though the nation's well-being may be greater, certain segments of the economy may struggle. Certain regions of the economy--we'll talk about that in a little bit. So, West Virginia, yes, is not punished by the import of coal. It's been punished by the coal that came from the west. And it's been punished by the improvements in technology that made the rest of us much wealthier because coal was cheaper in response to those technological improvements. So, there is a distributive, regional, sectoral cost to some of either trade changes or technological innovation changes that a country might be concerned about and would have political importance. Scott Sumner: Yeah, I agree. And let me make a couple other points. Just to be clear: I'm not claiming every case is like West Virginia where it isn't trade. There are some regional problems that are due to trade. There was a paper, I think it was Card and Autor? Russ Roberts: Autor. David Autor. Scott Sumner: On China? The China shock? Russ Roberts: Yeah. Scott Sumner: Yeah. Russ Roberts: Yeah, and I've interviewed David about that paper. Scott Sumner: What are the names? Russ Roberts: It's Card [Dorn, not Card--Econlib Ed.], and David Autor, and I've interviewed David about the paper. It's an interesting paper. I didn't agree with a lot of it. But it's a provocative thesis. He tries to measure the impact of China. Scott Sumner: Although even they argue that the net effect overall for the U.S.-with-China trade was positive, even in that paper. But, a couple of things I would point out. So, they looked at a period, I think 1990 to 2007. Well, the U.S. labor market did well during that period. On the other hand, I think when people were talking about the paper, it was after the 2008 recession, which was very severe, as you recall, and the recovery was very slow. So we had many years of high unemployment after 2008. And I think people often conflate problems of unemployment due to the business cycle with trade. So again, the period they looked at, the United States didn't have a major overall unemployment problem. We had some regions that were suffering, but the overall employment situation was very good. And then we went into a situation where we did have an overall unemployment problem, I would argue due to monetary policy mistakes, not due to international trade. But the tendency to conflate those issues when we have 10% unemployment, and people might look around and say, 'Well, look at those imports coming into the country.' Well, imports were coming in, in 2007, when we had 4% unemployment. Right? So, I think those issues can be mixed up in many people's minds. But I will not deny that some local communities were adversely affected--their labor market--by imports from China, just as local communities can be adversely affected by automation and by regional shifts in factories from Michigan to the South or from earlier, from Massachusetts to the South. So, I don't think anyone would say Massachusetts is worse off because we lost our textile and shoe making factories to southern states back in the 1950s, right? Russ Roberts: For sure. Well, they might, but-- Scott Sumner: Well, I mean, yeah. We were worse off, I guess, in Massachusetts, probably for decade or so. Russ Roberts: For a while, yeah. Scott Sumner: Yeah, maybe longer. But, I think that, looking back on the process, I don't think many people would say, 'It's too bad they now have this biotech--and etc.--industries. And, instead, if they'd stuck with shoe-making and textiles, they'd be better off.' Like, even if there was pain, I think most people would look at that change in Massachusetts and say, 'Long-term, that's a net positive.' Russ Roberts: Yeah. I just want to emphasize the point I made earlier: The reason we can have those tech jobs is because we don't have to spend so much time and energy and resources and people making sure it's a choose[?]. That's another connection, I think, to your common sense--one's common sense struggles to say[?]. By the way, the paper that we're referring to is by David Autor, David Dorn, and Gordon Hanson. You were, I think, confusing with something else. Scott Sumner: Okay, I'm sorry. Russ Roberts: Yeah, no problem. Scott Sumner: I confused it with I think a minimum wage paper. Sorry. Russ Roberts: Yeah, correct. It's okay. We'll put a link to the paper: "The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade." There's a couple "Labor Market Effects of Import Competition in the United States", "The China Syndrome," by the same authors. And we'll link to the interview I did with Autor and listeners can think about that. |
| 26:49 | Russ Roberts: So, I want to turn to an issue in these kind of debates: which is national security. And, you call this the more-sophisticated, less-vulgar argument for government intervening and trying to manipulate market outcomes from what they otherwise would be. I think there are two versions of this; and let's take them one at a time. The first is a nation, like China, appears to be on a potential collision course with the United States. So, trading with them, we may want to have a national policy of how we interact with them economically that takes that foreign policy phenomenon into account. The second issue is: a lot of people will argue that, 'Oh, trade ensured textiles and various other things are fine, but there's certain commodities--computer chips and other things--that we can't let the market determine the outcome because it will jeopardize national security.' And then, there's a third argument, which actually gets tied in sometimes to the first two for government intervention, which is the environment, which you alluded to earlier: that, if we let the market do its own thing, the environment will be hurt. And oftentimes, trade with China hurts the environment and risks our national security. So, there's two reasons we have to intervene. So, let's start with the--China generally. Should the potential confrontation in foreign policy between China and the United States affect the way we trade with China? Scott Sumner: Well, I can't say there's necessarily zero potential implications of that, but let me explain why I'm somewhat skeptical about claims in specific areas about foreign threats in general and their implication for U.S. policy. If you look back in history, over the course of my life, I've seen many, many claims made about foreign threats and risks associated with foreign policy that in retrospect proved exaggerated. You go way back to the 1950s--the missile gap with Russia--which turned out not to be the case. Then there was perception that Russia--the Soviet Union, sorry--the Soviet Union would sort of surpass the United States economically; and I think weren't there statements in textbooks by Paul Samuelson and so on about how the Soviets were doing better than the United States? In the 1980s, I remember a lot of worry from pundits that Japan was going to surpass the United States, and there was almost a little bit of hysteria about Japanese trade. Russ Roberts: Oh, yeah. Scott Sumner: You had films like Rising Sun and so on. Russ Roberts: And the essence of that, by the way, of that fear was that we, the United States--I was in America at the time--the United States was foolishly just letting markets allocate goods and services and importing things from Japan and elsewhere without understanding that this was a competition. Whereas Japan had this more sophisticated strategic alliance between the government and business, and that's why they were dominating us, the United States. And, if we didn't play on the same turf that they did, it was only a matter of time before they would not just surpass us, but impoverish us. In fact, there were all these sinister arguments that they were going to keep all the good jobs. My first book, which is on all these topics we're talking about--we'll link to it--it was called The Choice: A Fable of Free Trade and Protectionism. I wrote that book because I saw a documentary that claimed that Japan was hoarding all the good jobs and giving all the bad jobs to America so that they would be producing some computer game and they would keep all the innovative parts of that industry in Japan, and the call centers were what they dumped on the United States. And, that was--again, not just the result of market forces: that result of a strategy. And, if we didn't--the United States--have our own strategy for how to counteract that we would be taken advantage of. Well, that turned out to be a wildly--and I said so at the time; many others did; not like I was a seer or a prophet--I said that was silly. And, obviously as time passed, people forgot about that argument because Japan went into an extended period of stagnation and its innovative edge was lost in many industries. And then, of course, Mexico was next, with NAFTA [North American Free Trade Agreement]. So, carry on. Scott Sumner: Well, you know, I'd like to highlight your word 'sinister,' which I think is important. Germany also a very large industrial power, also ran huge trade surpluses. The anger was not directed against Germany. And I think that's worth thinking about. Now, you might say that's just coincidence, but go back to World War II. We put Japanese Americans into camps, but not German Americans. The Japanese Americans were viewed as more sinister. Russ Roberts: Yeah. Scott Sumner: Right? Now we have in Europe one of the most important wars since World War II: Russia invades Ukraine. And we're told the real national security threat is China. So, what's going on there? We have American universities banning Chinese students. We have American states banning Chinese people from buying real estate. So, it's worth thinking about how these attitudes towards trade are linked to maybe unconscious bias associated with ethnicity. Now, you're right. By the late 1990s, 10 years later, nobody worried much about the Japanese threat. And, I would argue that the fact that the Soviet threat and the Japanese threat didn't turn out to be what they thought at the time, played a big role in the rise of neoliberalism in the 1990s--the ideology in favor of free market and globalization. Because, the previous sort of statist, interventionist arguments seemed to have been discredited. Right? Another one is that East Asia--which was relying more on international trade, was surging ahead of Latin America, which relied on import substitution. Well, import substitution is a classic industrial policy. You put up trade barriers to build up your own industry. And that's what Latin America tried to do in the decades after World War II. And for a while, they were richer than East Asia. But East Asia decided to go for more open economies focusing on international trade. And they, by the 1990s, it was clear they were outperforming Latin America. That also led to more prestige with a neoliberal-globalization model versus industrial policy/import substitution/that sort of thing. And that, I think--in my view--was a good period in global history. It lasted for several decades. We saw that, by far, the biggest reduction in global poverty ever during this neoliberal era-- Russ Roberts: In human history-- Scott Sumner: But, unfortunately, in the last 10 years, much of the world, not just the United States, but much of the entire world has swung away from neoliberalism towards nationalism and nationalistic economic policies. And this has been occurring in many, many different places. So, I'm very concerned about the fact that we've sort of forgotten some of the lessons that I thought we had learned from failed policies during those periods in the 1960s, 1970s, and so on. And, I feel like I need to sort of remind people of the actual pattern of how policies disappointed, in many cases, earlier advocates of industrial policy. But, yeah, I think that's where we are right now, is we're heading back towards a world of less-free markets, more industrial policy. |
| 36:06 | Russ Roberts: Well, this whole conversation has been worth it, Scott, just to hear you use the word 'neoliberalism' without embarrassment. You know, it's become a incredible slander that's invoked to explain all the ills of America and elsewhere. I do think the world between that time period you're talking about--let's say roughly 1980 to 2010--roughly got more market-oriented in terms of globalization. The world got more globalized. China entered the world economy, which had an enormous impact--mostly for the good, not for every single person--but mostly for the good in the form of much less expensive toys, clothes, car, you name it. Amazing numbers of things got less expensive because of Chinese being able to trade with the rest of the world. Like, having a magic Santa's workshop is another analogy you can make for trade. These gifts, effectively--things that were once expensive became much cheaper. Which meant people could afford more of other things, which meant people's standards of living improved. And it's not just toys and, say, Christmas ornaments, which people would often often say. Health got better because we could invest more in health technology. And, all kinds of other changes that took place over the last 30, 40, and 50 years have partly, if not significantly, been due to globalization. But, at the same time, neoliberalism got blamed for all kinds of things that actually never happened. Smaller government, less regulation--the ideology of free marketers, Milton Friedman, Hayek, certain Republican politicians like Ronald Reagan that were invoked in the 1980s, they never happened. People advocated for those things. But, actually over this time period we're talking about, government got bigger. There are more regulations. There are exceptions in certain pockets of--there's deregulation in the 1970s under Carter and a little bit in the 1980s under Reagan. But, overall, government got much bigger in the United States. So, to blame the ills of the United States, whatever they are, on free market policies, I argue is a weird fantasy. It only happened in the little area that we're talking about, which is globalization. The world did get more open to trade with its foreign neighbors. There were certain improvements with lots of strings in free trade agreements. Many of those--Milton Friedman used to say,' It's a very, very free trade agreement--but not NAFTA.' I said, 'What are you talking about? Why not NAFTA?' He goes, 'It's not a free trade agreement. It's full restrictions on trade and the path towards freer trade, and it favors a bunch of different industries.' So, we did not embrace the laissez-faire, utopian vision of the neoliberals like Friedman and Hayek. And the people who blame them for everything wrong in America, whether it's inequality or whatever they happen to choose, is absurd. Most of those ideas were rejected by the political process, and were never implemented. I have a long essay on it. We'll link to that too. But it drives me crazy. So, to hear you defend the globalization, the neoliberals without apology or embarrassment is a treat. Scott Sumner: Well, thank you. Two points before I forget. One is: you're right about the United States. Now, it is true that in some foreign countries, there was a major move towards free markets. Russ Roberts: That's true. Scott Sumner: We mentioned China; to some extent in India. There was some privatization in Europe, and so on. So, you can point to-- Russ Roberts: Eastern Europe especially. Scott Sumner: Yeah. You can point to some examples. You mentioned Israel, is that it? Did you mention Israel in here? Russ Roberts: I did not. I'm sitting in Israel, but I did not mention it. Scott Sumner: Oh, okay. Well-- Russ Roberts: But, Israel did become less socialist over this time period, and its economy took off like a rocket. Yeah. Scott Sumner: Right. And so, if you look at kind of like a cross-sectional test of neoliberalism, it looks a lot better than if you just look at time series. It's true that in the United States, the GDP growth rate during the neoliberal era was a little bit lower than the 1960s, let's say. But, there's many countries around the world that engaged in much more aggressive reforms; and typically, the countries that moved strongly towards neoliberalism did better when you compare to countries that stayed with a more statist model. The other point I want to mention before I forget is, I don't think I really answered your question about national security risks. So, I'd like to follow up a little bit more on that-- Russ Roberts: I was going to mention that-- Scott Sumner: I was remembering how, the past some of the threats were sort of exaggerated. But, let's bring it up a little bit closer to the present, and I'll try to explain my skepticism. Take the Ukraine war. So, in, I think it was February 2022, Russia invades Ukraine; and the economists and foreign policy experts that were focusing on this problem made some very confident predictions early on. One was that the Western sanctions were going to be highly effective. Do you remember that? Russ Roberts: Sanctions on Russia-- Scott Sumner: There were many articles about how devastating Western sanctions on Russia--which were quite comprehensive, incorporating many, many countries--were going to severely hurt the Russian economy. A second confident prediction was that the Russian shutoff of natural gas to Europe would have a devastating effect on the European economy. Okay: I saw these predictions widely disseminated in the press. From experts. Both predictions turned out to be completely wrong. The Russian economy has done fine, and the European economy got through those winters, finding substitutes for Russian natural gas. So, we have to be very, very cautious in interpreting these claims about how sensitive we are to risks of being cut off from something during wartime. Now, if you look at Russia, for instance, they're still getting a lot of important manufactured goods from countries like Germany, which are supposed to be participating in the sanctions. Well, what's happening is German exports go to--I don't know--Kazakhstan or Kyrgyzstan. And then you look at the trade accounts for these central Asian republics, and their trade with Russia skyrocketed after 2022--of industrial machinery. Well, it's clear what's going on, right? I saw a short bit on how some of these real advanced computer chips that were supposedly denying China are still widely available in Chinese wholesale markets. And in fact, they're actually very cheap. There's so many there that they're not even causing any stress for China. Now, obviously, these are anecdotes, and you can say, 'Well, there's other situations where maybe we are vulnerable.' But, I would also point out that--I would say the United States is by far in the strongest position of any country in terms of foreign policy risks. And I am not exaggerating when I say 'by far.' When you look at things from the position of other countries, the U.S. position seems enviable. Like, energy is a key resource, right? Well, we've become basically self-sufficient in coal, oil, gas, everything. Or we get a little bit of oil from Canada, but that's very reliable. Food, another essential good: we're basically self-sufficient in food, right? Well, what about industrial equipment like chips? That's where a lot of the focus is now. Well, think about not individual countries, but blocks of countries. Like, who are the allies that we can rely on when there's an international conflict? We have good relations with South Korea, Japan, Canada, Europe. Well, South Korea and Japan are important chip makers. We still make some chips. China does make computer chips, but what are the countries that China can rely on in a conflict? North Korea? What are the countries that Russia can rely on? Belarus? So, the United States has strong connections with a wide range of important industrial countries around the world that are our allies and sources of economic strength in an international conflict. Our other major adversaries actually have very few real friends that they can rely on. We also dominate the global financial system. We can use our banking regulations to shut off countries from money flows and so on. We have so many advantages in terms of strength in a potential conflict, compared to other countries that are far more exposed to international trade and have far fewer reliable allies, that I think we tend to lose sight of that. And, when I hear about how devastating it would be if we lost access to Taiwan's computer chips, I just think back to what we were told about what the cutoff of natural gas would do to Europe. Maybe that's correct. I'm not an expert on computer chips. But I think we underestimate the ability of industry to find substitutes, to find other ways of doing things; and I think we tend to exaggerate the extent to which the United States is in a fragile position in terms of geopolitics. I think we're in an extremely strong position, even as it is. Now I'm not saying that the people that favor some modest industrial policies are always wrong. Perhaps it was correct to do some subsidies for chip-making factories in the United States. What I'm saying is these arguments should be very strictly limited. There are probably very few cases where there's resources that are so essential that we can't rely on a free market. So, when I see people argue for very expansive industrial policies--making the U.S. economy much more interventionist--that's when I get nervous. That's where I feel like the foreign policy argument is being abused, and people aren't recognizing the true position of the United States, the true strengths we have in geopolitical competition. Does that make sense? |
| 47:44 | Russ Roberts: Yeah. No; the only thing I would add is that national security is often invoked as the justification for some restriction. But of course, that ends up often benefiting a domestic producer and insulating them from some competition that would otherwise make them poorer. And, one should always ask, is this really a national security issue or is it the security of a particular player? In the 1990s and 2000s, the big argument was the U.S. economy is, quote, "being hollowed out." We can't get rich doing each other's laundry; that, we've gone from a manufacturing economy to a service economy. And to a large extent, that was not true. Manufacturing output was actually quite high, although we have an episode with Susan Houseman that's very interesting--I recommend you listen to it--that calls some of this into question about just how healthy the output part is. It turns out--I think her point was that it's almost all in computing: that, in other parts of the manufacturing sector and manufacturing part of the economy, they did do relatively poorly. But they certainly do poorly on unemployment--which is, again, this issue of whether it was driven by trade or whether it's driven by innovation. I don't think it's a bad thing that we lost a lot of manufacturing jobs due to innovation or trade. And in fact, we have lots of output. Again, whether the mix is too heavy toward computers--whole separate question. I want to put that to the side. The point I want to make is that this idea that somehow we can't grow or have a decent standard of living unless we have real jobs--manufacturing jobs--is a myth. It's not true. It's a misunderstanding of where growth comes from. My joke version of it is: Well, if salaries in the NBA [National Basketball Association] are really high, let's expand the NBA to more teams because more employment and high wages make us wealthier. Well, we understand that if we have 3000 basketball teams instead of 30, the wages won't be high. People won't pay to watch me play basketball--or even you, Scott, who I assume is taller than I am. I'm 5'6". So, the point is, is that this whole scary, sinister, conspiratorial argument that foreigners are stealing our jobs, hollowing out our economy--the data aren't consistent with it. Our economy, over this time period when manufacturing shrunk as a proportion of employment--which is 1950 to 2024--were fabulous years for the U.S. economy. Again, hard on some people when those transitions took place, when improvements in technology or trade flows made some businesses close. That was hard on the people who lost their jobs. But overall for the economy, it was very large and positive. And for those who lost their jobs, many of them found new jobs that were pretty good; and certainly, their children and grandchildren--when we think back to 1950--benefited tremendously from this willingness to accept economic change due to either trade or technology. The more advanced version of this argument, which I want to put on the table, is that the reason we have to have, say, automobile manufacturing, is because that's for national security. Why? Because if we don't have an automobile factory, eventually we might lose the know-how of the industrial processes that we'll need for certain military products--fighter planes, tanks, and so on. And, I look at that argument and I think two things. One is, well, the next war, I'm never sure what really is going to be the key product. We thought in 1945 that tanks were really important. They're less important to the United States in 2024. The United States does not need as many B-52s or bombers as the United States needed in 1945. But, I even question whether we couldn't regain that know-how if had to. If the United States was relatively factory-free, is it really the case that engineers--and we have--I keep saying 'we.' I moved to Israel three years ago, and I still tend to think of the United States as 'we.' But the United States--and I'm still a citizen so I can say 'we'--if the United States lost all of its factories and suddenly found itself at the mercy of a foreign threat and didn't have the network of friends that you talked about to provide certain things and products that are crucial--whether it's computer chips or some titanium or some obscure raw material that's only found a few places--you make the point, which is fantastic, there are often substitutes. But, I'm asking the question: Is it really that hard to restart industrial know-how in an highly-educated country of world-class, first-rate engineers? I don't know the answer to that. I encourage listeners to weigh in on it. But, do you have any thoughts on that, Scott? And, have you heard that argument? Scott Sumner: Well, I think if you think of it in a realistic sense, obviously we've had some losses in manufacturing, but we still have a gigantic manufacturing sector. If it went to zero, then I think you could argue, yeah, it might be hard to restart. But, from where we are now and likely to be for decades, I don't think that's a big problem. And I would add a few points. So, when we think of foreign policy threats, you can think in terms of, like, conventional, World-War-II-style military conflict, and you can think of uncertain high-tech futuristic conflict. Right? So, let's take those two. If we think of the old-style conventional conflict, kind of like the Russia-Ukraine war--I mean, that does have modern things like drones, but it's also a little bit like a World-War-II-style war--we can see that Russia is having trouble with a small, impoverished country, head-to-head, in a conventional, World-War-II-style war. In my view, there's almost zero chance of either Russia or China landing a D-Day-style invasion on the shores of the United States. Like, that's not the real, actual foreign policy threat. There is a nuclear threat, which might even be a threat associated with miscalculation, not something intentional; and that's something to worry about. There's also a lot of people talking about potential future threats associated with high-tech AI [artificial intelligence]. What kind of weapons could AI develop? All of that. And, I'm not really qualified to talk about that in detail. I don't know exactly what those threats might be. But I would point out that--you mentioned earlier how our industrial growth had been oriented towards computers and not the old-style industries. And I think that's true; but that actually works in our favor in terms of these futuristic threats, right? So, right now, I believe the U.S. stock market capitalization is 60% of the entire world. We're only like 20, 25% of world GDP, but we're 60% of stock market capitalization. Why is that? Basically, the answer is very simple: our high-tech industries. That's the primary reason why we have 60% of the world's market capitalization. We completely dominate the cutting edge of high technology. Now, there are individual sectors--like Taiwan in high-end computer chips and the Netherlands in machines that make computer chips--where other countries do very well. But we overall dominate high-tech. And we have innovative, new defense firms that are putting these to use, coming up with new military weapons, and so on, based on our advantage in high technology. So, in that kind of world, our ability to make tanks is much less important than our ability to keep on the forefront of artificial intelligence and things like that. So again, I think if you look at the world that way, our position is much less fragile than it looks to a lot of people and the impression you get reading the press about all these threats out there. I think if--people sitting in these other countries that are supposedly a threat to the United States probably feel exactly the opposite--that they're in the inferior position right now, in terms of the global pecking order. So, yeah: I think technology is actually an enormous foreign policy strength for the United States at the moment. And, I think probably going forward, given all the recent developments that have been occurring here in areas like artificial intelligence. Again, the one area where I think the industrial people maybe have an argument is maybe the subsidies to move a few chip-making factories here. That might have made sense for national security reasons. It's hard for me to say. It's hard to speculate as to what might happen between China and Taiwan going forward. If there was an invasion, would the Taiwanese chip-making factories be destroyed? I don't know what the Taiwanese government plan is in that regard. But I would say this: If you take the Taiwanese chip-making off the table, I still think the United States is in a pretty strong international position relative to China and Russia because of our ability, plus South Korea, Japan, Europe and so on, in combination, versus any adversary outside of that block. |
| 58:17 | Russ Roberts: Well, I think the argument with respect to AI is similar to the kind of arguments we heard in the 1990s with respect to Japan, which would go something like this: Yes, the best AI companies and incredible innovation is taking place in the United States; and the talent that is being poured into that sector in the United States--startups--is enormous. But we're not doing it in a systematic way. That would be the scary thing. It is going to give you better memos, and it will write some poems for you, and it will help you plan your dinner recipes. But, in China, they're doing it not for those day-to-day, mundane, simple things. They're doing it to dominate the world. And therefore, we have to have a similar top-down control of this new technology. Now, as you pointed out, that could be true. As you admitted in your case, I'll admit in mine: I don't know if that's a plausible threat or not. What I do know is what you know, which is that--and you've hammered on this and I think it's really a really an important point so I'm going to hammer on it a little bit more--which is: having been alive for the last 50 years of people trying to scare people, most of those scares were exaggerated because they forgot something. In the case of the sanctions or cutting off access to raw materials, they forgot that there's substitution. And people can find ways around this, either with new products or by importing it from a third party that isn't part of the sanction deal. And, in the case of China--everyone just assumes China is this flawless juggernaut of economic well-being. They've got ghost cities with uninhabited buildings. To assume that because they're trying to develop an AI that can take over the world, that therefore they'll be able to, despite the lack of incentives in their system and their attempts to create those artificially through rewarding productivity and their friends, is maybe wildly, wildly overstated. You know, I think--sitting here in Israel, when we heard about the sinister nature of Iran--the world has been afraid of Iran for 40 years. Well, they don't have any missile defense right now. Israel took it out in one night. They are totally vulnerable to anything Israel wants to do. Now, we can't do everything we want to do. It might be very hard for us to destroy their nuclear capability. They're smart. They put them in very deep bunkers. But it's very clear that their threat to this country was exaggerated. They launched--they've launched 400, 500 missiles at Israel since I've been, in the last six months. And they, I think the first attack, they injured a Bedouin nine-year-old; and, thank God, she's fine. She went to the hospital and she's okay. The last one, they tragically killed an Arab-Israeli citizen with a piece of shrapnel. A piece of a rocket fell out of the sky that was shot down by a much superior technology of Iron Dome. So, it's just amazing how easy it is to be terrified by things that aren't true. Of course, the flip side is we didn't think Hamas was a threat. And on October 7th, 2023, they proved us very, very wrong. So, I don't want to suggest you should never be worried about anything. But, in these cases of large national policy, it's often the case that paranoia is stoked and fear is stoked by people who have a different agenda than what appears to be the case. And it's not obvious that--just as Japan did not dominate the world economy ultimately--it's not obvious China will, either. Scott Sumner: Yeah, I agree. I would add a few points about China. You mentioned this perception that China wants to dominate the world. I agree that perception is out there. I think there's actually very, very little evidence to back it up. Just to be clear, I'm not saying China is not a foreign policy threat. I absolutely think China is a major foreign policy threat to Taiwan. That's a major risk. And, if there were a war between China and Taiwan, it would have a devastating effect on the world because of its indirect effects. So, I don't mean to speak lightly of that potential threat. But, beyond Taiwan, I actually don't think China is a particularly expansionist power. People will point to the little islands in the South China Sea; but those are uninhabited, not very important. And, by the way, the largest of them is controlled by Taiwan, which is almost never reported in the press, right? But China, really throughout its history, has not been a particularly expansionary power--given its size. Certainly nothing like Russia. Right? And so, what's going on is--I keep coming back to this term 'sinister.' I think that the perception--there's much more suspicion about China's intentions than about Russia's intentions. Now part of that perhaps can be justified by the fact that the Chinese economy is much larger than Russia's. The population is larger. But, you know, China has--even today, China's per capita GDP is about the same as Mexico. Now, its high-tech sector is more advanced than Mexico. So, that's a point that might be important in terms of military potential. But, overall, its economy is at about the level of Mexico. It's likely to grow further; but it's almost certainly going to remain well below U.S. levels on a per capita basis. As far as their population is concerned, it is very large; but it's also declining rapidly. It'll probably fall more than in half during the 21st century. More than in half. A hundred years from now, it's very possible that Pakistan and Nigeria will have each more people than China. That's where things are headed based on current birth rates. So, I think that, obviously, China is a major power. It is a foreign policy threat--to Taiwan, certainly. But I don't think they have expansionist aims much beyond that. Unfortunately, China is often its own worst enemy. They're very prickly about criticism. So, they sometimes will put trade sanctions on a country that criticizes the Chinese government. And, I think these--the thin-skinned nature of their government--creates a perception that they're more of a threat than they really are. So, I mean, obviously, we have to have a defense capability in the United States to meet any potential threat, whether it be China, Russia, whatever. So, we need a strong military to deter. But I think a lot of the concerns that are driving industrial policy are driven by an excessive degree of fear about what the Chinese are actually interested in doing in the future. [More to come, 1:06:24] Russ Roberts: I hope you're right, but-- Scott Sumner: Let me just interject. I see claims that, you know, China might attack Japan and invade Japan. These seem very fanciful to me. I could not even imagine any rationale for China attacking Japan. Or South Korea. |
| 1:06:48 | Russ Roberts: You might be right. I always worry about the downside risk. So, I think one should be prepared for worst-case scenarios, whether you're South Korea, Japan, or the United States, or Israel. And I think Israel's security failure of 2023 in October was a failure to remember that. It was an overconfidence. So, I know you're not saying it's nothing to worry about; we shouldn't be prepared for it. The question is: should it be front and center all the time? Should it drive other policy areas--policy outcomes? And be the main decision-maker, the main factor that drives decision-making in, say, economic policy? Right now-- Scott Sumner: Let me-- Russ Roberts: Yeah, go ahead. Scott Sumner: Let me give an example. So, Japan responded to the Ukraine war by dramatically increasing its defense spending. Right? I think that was appropriate. Japan looked at the situation, saw, 'Oh, we're in a new world where countries are willing to go back to World War II-style invasions for territorial conquest.' That's something that had fallen basically out of favor since World War II, other than maybe Iraq taking Kuwait or whatever. But, most wars since then have been civil wars, okay? So, that sort of response I think was appropriate. Japan is building up its military to deter foreign attacks. What would not be appropriate would be for the United States to say, 'Oh, we can't buy Chinese electric cars because they have computers that can monitor where you drive.' That's just not a plausible foreign policy threat to the United States. I'm sorry. Like, I don't really worry about whether the Chinese government knows that I've driven my car to the shopping center. If you want to say, 'Well, the Secretary of Defense should not drive a Chinese car,' fine. But, what I'm saying is that I'm seeing more and more claims that Chinese students shouldn't go to American state colleges because they might be spies. Or, they shouldn't buy real estate in Florida because they might spy on a nearby military base. These are just examples of hysteria, to put it bluntly. And, this is what worries me about the reaction to the China threat. I'm not at all arguing that we shouldn't take the threat seriously. That we shouldn't worry about the situation in Taiwan. That we shouldn't support Taiwan with military aid or whatever. I'm personally on record favoring U.S. support for Ukraine in their war with Russia. So, I'm not a pacifist. But I'm saying: Let's not exaggerate the risks beyond where they are and tear up our whole free-market model in ways that actually might make us weaker in the long run. It's interesting how proponents of industrial policy almost never say, 'We need to deregulate X, Y, and Z to address these policy problems,' right? Like: Repeal Davis-Bacon, repeal the Jones Act, have the United States join that Asian free-trade zone that we decided not to join a decade ago, which would be an alternative to China. Well, we decided to pull out so those countries want to get closer to China, to get Chinese investment. That was an unforced error. Accept a lot more high skilled immigrants from India, China, other countries. That would strengthen our high-tech sector. These are all free-market things that can be done. Getting back to regional poverty and so on, working class poverty, why isn't the industrial policy to eliminate residential zoning laws? Because the living standard of blue collar workers in places like California is devastated by the high housing prices. Eliminating those residential zoning laws would make houses considerably cheaper on the two coasts, and it would create many blue-collar jobs building new houses. There are so many industrial policies you can point to that would address the exact problems that people say they're worried about, but they would involve deregulation. And yet, I almost always see proponents of industrial policy advocating more regulation, which would tend, on average, to make the United States a little poorer. And, in the very long run, your ability to have strength in a geopolitical sense is linked to the strength of your economy. Russ Roberts: It's a fantastic point about how often it's deregulation that would achieve a similar end or maybe achieve it more effectively--or achieve it rather than not achieve it, or at a lower cost. I am agnostic on whether we should be worried about computers and electric cars from China or, say, TikTok, which has the ability to monitor American activity. I think the worry there is more of a blackmail issue--the ability of a foreign country to, not conquer it, but impose certain restrictions that would reduce flexibility and responsiveness to various policy situations because of the threat that China could hold over, say, the United States. I am happy for listeners to send me articles I should read that are from authors who are more concerned than you are, Scott. So, I am not an expert on this, but I'm sympathetic to your idea that, often, these issues are overblown. I want to close with--I'm going to shift gears-- Scott Sumner: Can I just interject one quick example? Russ Roberts: Yeah, sure. Yeah. Scott Sumner: China tried to pressure Australia after Australia criticized the Chinese government--with trade sanctions. And, Australia refused to give up on their free-speech policy for government officials, and China eventually backed off on these trade sanctions. Australia is a lot weaker country than the United States. So I'm not really--I think China did the wrong thing. Let me be very clear. And that they are their own worst enemy, often. But I think we exaggerate how much power China has. Go ahead. Russ Roberts: It's obvious that our sheep- and wool-sector needs bolstering because that's obviously why Australia was able to stand up to the Chinese threat; and we don't--the United States--have that kind of sheep- and wool-sector like Australia has, and it's obviously a crucial national security sector. |
| 1:14:11 | Russ Roberts: I want to change gears and close with something entirely different. I think about you, Scott, every once in a while because you are the single person most associated with the idea that the Federal Reserve should target nominal GDP. We've had a number of conversations about that. Listeners can go back and listen. Those conversations are part of, I don't know, dozens of episodes of EconTalk on monetary policy and the role of the central bank. And, it's striking to me that we live in 2024, in a world where we just, in the United States, had a Presidential election where economic issues played almost no role in the conversation. You can debate whether immigration is an economic issue--I think it is--but I think the main focus of that was cultural, not economic, not monetary. A mere 32 years ago, James Carville said, 'It's the economy, stupid.' And, I don't think it was the economy in 2024, although it played a role. Inflation was one of the key issues. But neither candidates seem to be able to have an economics-based conversation around inflation. Which is a little bit weird. And, in my experience over the last 10 years, monitoring fiscal policy, which were the bread and butter of many, many economists, and certainly the centerpiece of many Presidential campaigns: Should taxes be raised or lowered? Should government spending be increased or decreased? Should monetary policy be looser or stricter? Not on the table. Not on the table. And, the last issue I would mention, which lurks in the background of the United States--which I don't think got mentioned, but maybe I missed it--is the national debt. And, the Republican Party is the party typically associated with being hawkish on debt--meaning worried about it--and the Republican Party chose a standard-bearer--a standard-bearer that won--who doesn't seem to be very concerned about it. So, I'd just like your reflections on this moment as an economist where the things that you and I were educated in and grew up in and were the central policy issues of our youth and our adulthood--now our old age--nobody cares about them. That will change. But, in particular, I know you have some interesting thoughts on debt. It's strange to me that it's not an issue. There are many possible reasons for that. I'd just like to hear your thoughts--whether you think it's a serious issue and whether you think we're going to do anything about it. Scott Sumner: Yeah. From my perspective, there's been a dumbing down of politics in general, in the United States, maybe to some extent in both parties. Economists are out of favor in Washington. That's widely known. And, I'm sure many non-economists say, 'Well, that's good because they did a horrible job.' But I think historically, when we go away from economic principles, things get even worse. And, we're moving a little bit in a banana-republic direction in the United States--politically and economically, I would argue. Economically, there's two things I could point to. One is an excessively reckless fiscal policy, and the other is protectionism. And, both of those are characteristics of banana republics. In terms of fiscal policy, this is an issue that's widely-- Russ Roberts: You should just--when you say a 'banana republic,' I assume you're referring to a dysfunctional economic system. Scott Sumner: Like Argentina, someplace like that. Russ Roberts: Yeah. Yeah. Okay, carry on. Scott Sumner: Maybe that term is considered not politically correct: I don't know. But, a country that has been dysfunctional in an economic sense for a long time, and often politically as well. Russ Roberts: With even larger disparities in wealth and income than the United States is accused of, and a very low or negative growth rate over time, which shows something's gone wrong. Scott Sumner: Now obviously, we're the Number One economy in the world. So, in one sense, it's silly to compare us to a banana republic. But, I'm just talking about trends in politics and economic policymaking. In terms of levels, the United States is still Number One in the world. So, let's talk about fiscal policy, which is often misunderstood. I've heard, my entire life, about how the deficit was out of control. And, this-- Russ Roberts: Not the trade deficit. Now you're talking about the budget deficit. Scott Sumner: The budget deficit. Right. Russ Roberts: The revenue that the Federal government has relative to how much it spends. Scott Sumner: Right. And, you can argue that deficit has been somewhat of a problem for much of my life. But, most of those claims were kind of inaccurate, like the boy who cried wolf in the storybook. And, the public eventually tuned that out. So, the public has pretty much stopped worrying about the budget deficit, at least in terms of voting behavior, right? What about the-- Russ Roberts: It's not a salient issue. It's not a salient issue-- Scott Sumner: And also, economists--and I think this reflects poorly on the economics profession--started to discount worries about budget deficits, especially in the late 2010s. Well, it turns out the late 2010s was exactly when the budget deficit finally did become a serious problem. The wolf finally got here just when people stopped worrying about it because of all these false warnings of catastrophe ahead if we kept running deficits. Starting in the late 2010s, our fiscal policy became increasingly unsustainable. And by that, I mean that the national debt as a share of GDP is on track to rise sharply over time. You can almost date it to about 2016. Normally, budget deficits fall during economic expansions. They fell a lot--quite a bit--between 2010 and 2015. And then, even though the economy was booming and we were not at war, the budget deficits started getting much bigger after 2016. This was a red flag that most economists did not notice. Of course, during COVID [COronaVIrus Disease], it got much, much bigger--partly for justifiable reasons, but also excessively so with some of the stimulus. And, coming out of COVID, it has remained at far too high a level, given the state of the economy--which is very strong. The labor market is booming. So, there's absolutely no justification for running deficits at these levels in this kind of economic environment. That makes me very worried. Neither candidate had any solution proposed. I don't even know what to make of Trump's policies because who knows what he'll do: but it does seem likely there will be a continuation of the tax cuts. So, unless he has some plan to cut spending in some way I'm not aware of, there's real concern about where the deficit is going forward. And that's assuming he doesn't do a lot of the things promised in the campaign--the no tax on tips, no tax on overtime, no tax on social security, bringing the SALT deduction [State And Local Tax deduction, allowing credit on Federal taxes for tax payments made on state and local government taxes] back. So, almost every week, there was another promise. But, even if he does none of those things would be very, very costly. Just maintaining the previous tax cuts when they come up for renewal, and maintaining military spending and entitlement spending, puts us on an unsustainable track. So, maybe there'll be a solution. Some of his advisors like Elon Musk are talking about big changes. But we'll have to see. But, right now, I just don't see any sign that we're serious about the deficit situation. So, fortunately, the United States has a lot of strengths. We can run deficits for quite a few years without a catastrophe. But, we are on a much more serious track or path since 2016 than were in the previous parts of American history, when the deficit was sustainable, clearly, up until around that time. And now, it's not sustainable, long term, I would argue. Russ Roberts: For those out there listening who hope that Elon Musk will reduce waste, fraud, and abuse: It's possible. Government efficiency is supposedly going to be an area he's going to contribute to. The track record of that plan for reducing deficits is very poor. Getting rid of the deficits we're talking about are going to require spending cuts, especially if those tax cuts are kept in place. And, the public has no taste for those and they're not politically attractive to President Trump or whoever might succeed him. I remember the moment in--I can't even remember the issue now--but at one point, Kamala Harris proposed some expansion of, whether it was housing subsidies or something. And some interviewer asked her how she planned to pay for it. And, it was just a striking moment that she didn't feel she had to answer that. She just said, 'Well, we have to do it.' And, she was perfectly comfortable assuming--the listener assumes, 'Oh, we'll borrow the money.' |
| 1:24:30 | Russ Roberts: So, let's close with how--you're now playing the sinister role, Scott. You're trying to scare the listeners about the deficit instead of China. How would I know--how would we know--that the deficit is an issue? What would be the manifestation? Because, a lot of times, there are certain macroeconomic problems that, they're not a problem until they are. And once they are, it's too late. And you can't borrow money anymore because people no longer trust you to pay it back. So, I assume the thing one should keep an eye out for--rising interest rates? What would be the indication that this deficit is unsustainable? Scott Sumner: Well, interestingly, there's a good argument that budget deficits also contribute to the trade deficit. So, if economists believe the trade deficit is due to a savings/investment imbalance--and that deficits are negative saving. So, one of the problems with populist economics is it's often inconsistent. It tries to treat a trade deficit with tariffs. And that doesn't work--and it hasn't worked in the last 10 years when it's actually being driven by a budget deficit to some extent--which is itself reflective of populist policies. How would it show up? I don't think it would show up as a sort of 2008-style crisis, suddenly. It would show up in terms of gradual negative performance of the economy in one of two ways. Either in the future we'd have to sharply raise taxes, which would be a drag on the economy. Or, we would raise the inflation rate to inflate away the debt. So, those would be two possible ways in which we could address it in the future. Now, that could be a long way off, just to be clear. So, it's a hard problem to deal with politically because there's a very good chance that you could go another 10 years along this exact track with nothing all that noticeable happening. And, you know, I understand why people are skeptical of the problem if that's the situation. But, I do think that if you just look at the numbers, this track doesn't seem sustainable in the very long run. And, unfortunately--you know, the public, we blame politicians. And politicians are afraid to offer solutions, as you point out with the example, the Harris interview. But they're reacting to the public. When you poll the public on the deficit, they say, 'Absolutely, the budget deficit is bad, get rid of it.' But, if you poll them on every single possible way you could do that--like, sharply raised taxes, slash the defense budget, slash Social Security, Medicare, whatever--they don't have any answers other than, like: Cut foreign aid--which is a tiny percentage of the budget--or eliminate waste. Like, there's a line in the budget that says waste-- Russ Roberts: Let's get rid of that-- Scott Sumner: so many billion. Just scratch that one out. And so, the public has sort of a Hollywood view of economics where if some brave reformer went in and just cleaned up this mess, all our problems would be solved. But, in fact, the public likes a lot of these programs that are contributing to the deficit. So, economists are in the unpopular position of pointing out that there aren't easy solutions to these problems. I wish I could offer something that was more upbeat. Russ Roberts: My guest today has been Scott Sumner. Scott, thanks for being part of EconTalk. Scott Sumner: Thank you, Russ. Enjoyed it. |
READER COMMENTS
Abe
Dec 9 2024 at 11:47am
I’m old enough to remember when “trading makes it more difficult to go to war with your trade partners” was an argument for free trade.
David Schatsky
Dec 9 2024 at 4:27pm
The conversation featured discussion of various geopolitical risks that The guest suggested were too small to worry about. But no analysis of the level of risk was offered. It also mentioned some instances where industrial policy is probably a good idea. The entire conversation seemed to boil down to: when reward exceeds risk, go with reward. Hard to take away much more than that.
Schepp
Dec 10 2024 at 8:32am
I agree with Mr. Schatsky. A very shallow assessment of the risks. Cooperation and trade are founded on a generalized agreement among the cooperators and trading partners on the generalized terms of trade. Local trade among tight agreement partners is very different than foreign trade with potential military threats.
I challenge the cavalier citation of Xenophobia. The use of making persons entering a territory say Shibboleth appears to be arbitrary and capricious, except for the fact that it saved lives and improved the operation of Hebrew Society. Strong ties to people close to you form the foundation that allows you to reach out and trade more internationally. Not considering the impact to those close can cause the foundation to fail impairing internal relations and external trade.
If there is no such thing as a free lunch, why would we expect free trade. The conversation did seem to be condescending as noted by Dr. Sumner. A far better conversation may have focused on how to determine the market price(process) for establishing effective trade and how to determine which collective activities and protection best from the foundation for beneficial trade.
Comment from an international trade supporter and someone who has concern over too much industrial policy.
SK
Dec 9 2024 at 5:04pm
Can Scott name any geopolitical experts who do not see China as a far different threat than Japan was in 1980’s?
Most I know who have been historical free trade supporters fear China: critical medicines made there we need; and the overall geopolitical ambitions of China.
Is the fear justified vs what Scott describes of past fears? I would suggest yes and Scott seems to be more circumspect re the risk of China without quite explaining why fear of China might be different that past fears. Concerns regarding China I doubt for most are xenophobic for the most part, if not completely.
As said most I know with who are free trade oriented are reevaluating that position based on view of China and so far I find no compelling reasons or way to rebut their views.
Mathew A
Dec 13 2024 at 6:37pm
Agreed. Not to mention Japan was an ally, China is not.
If China stopped stealing tech, gave up on Taiwan and opened up their economy to us, my position would change greatly
Pete Ruble
Dec 9 2024 at 5:26pm
Having recently started the recent Nobel winner Why Nations Fail, I enjoyed the perspective on trade and technology, which is exactly the type of ‘creative destruction’ referred to in the book that is the cause of long-term growth for economies.
Often times authoritarian states don’t allow this type of creative destruction as it can jeopardize their position of power (see Russia, many Latin American dictatorships) whereas nations with less concentrated power that have allowed this to occur (Western Europe, USA, some East Asian nations) have by and large seen stronger growth over the decades.
I enjoyed the wide-ranging conversation.
J
Dec 9 2024 at 7:12pm
I found this conversation a bit disappointing. I know the point of it was largely to have a US-focused conversation and the US discourse on this topic is often quite focused on trade deficits, etc. But anyone listening to this show probably didn’t learn much or hear anything which was new to them.
I don’t think you can have a conversation about industrial policy without talking about sectoral development strategies and the various successes and failures of industrial policy globally, especially in East Asia. “South Korea ran trade deficits” isn’t sufficient.
I appreciate that the finer points of how Country X developed sector Y aren’t Scott’s focus and that’s fine, but I wanted more out of a conversation on this topic.
Shawn
Dec 9 2024 at 9:24pm
Israel should trade with Iran. Just think of the massive boost in GDP.
Shawn
Dec 10 2024 at 8:38am
How Free Trade Destroys Tradition: Eviscerating Domestic Business to Help Foreigners Has Horrid Downstream Consequences
https://www.theamericantribune.news/p/how-free-trade-destroys-tradition
Shawn
Dec 10 2024 at 8:38am
When Liberals Fought Free Trade by Justin Vassallo
“In the end, a new outlook on trade is inseparable from confronting how avaricious and irrational our economy has become. In a society as unequal as ours, it is somehow normal to spend a Christmas-sized budget on myriad food-service conveniences, fast fashion, bank fees, and subscription plans—to say nothing of shady medical bills, large insurance premiums, and extortionary credit-card interest rates. By contrast, experts have insisted it is patently “uneconomic” and coercive to ask consumers to spend a bit more on domestically produced goods, whether they be clothes, machine tools, toys, appliances, or furniture. As ever, we are urged to disregard the living standards and relative security of workers when trade was more controlled, to equate today’s one-click “abundance” for a life well-lived. The service/servant economy continues to explode, with few asking why and for whom, while it is taken as an irreversible fact that we can neither aid domestic textiles hit by e-commerce giants like Shein and Temu nor assemble a whole computer from American-made parts.”
https://www.compactmag.com/article/when-liberals-fought-free-trade
Shawn
Dec 10 2024 at 8:40am
“…real-world growth comes from innovation rather than allocation—the development of new products via the combination of knowledge from different but related industries. It relies upon combining knowledge embodied in single-use resources—in the form of both highly specialized workers and highly specialized machines—rather than multiple-use ones. This knowledge is more likely to exist in countries with diversified industrial systems, rather than specialized ones.
These empirical findings also cast a very different light on the populist revolts that are currently disturbing the pro-globalization consensus, which has dominated economic policy for the last thirty years. These revolts are not unthinking reactions against rationality, as mainstream economists like to believe, but reactions to the failure of the real world to conform to the irrational thinking of economists, and the damaging policies that have been imposed by politicians following their advice.
Thirty years of trade policies pursuing the false promise of specialization have meant that residents of the Rust Belt states of the United States, and the economically depressed regions of the United Kingdom, can now compare the promise of globalization with the reality. They voted against globalisation, not because they were too intellectually limited to perceive its benefits, but because experience gave them the lens through which to reject the Ricardian Myth of the advantages of national specialization.”
Ricardo’s Vice and the Virtues of Industrial Diversity by Steve Keen
American Affairs Journal Volume I, Number 3 (Fall 2017)
https://americanaffairsjournal.org/2017/08/ricardos-vice-virtues-industrial-diversity
Shawn
Dec 10 2024 at 8:41am
“Adam Smith reduces the process of the formation of capital in the nation to the operation of a private rentier, whose income is determined by the value of his material capital, and who can only increase his income by savings which he again turns into capital. He does not consider that this theory of savings, which in the merchant’s office is quite correct, if followed by a whole nation must lead to poverty, barbarism, powerlessness, and decay of national progress. Where everyone saves and economises as much as he possibly can, no motive can exist for production. Where everyone merely takes thought for the accumulation of values of exchange, the mental power required for production vanishes.
A nation consisting of such insane misers would give up the defence of the nation from fear of the expenses of war, and would only learn the truth after all its property had been sacrificed to foreign extortion, that the wealth of nations is to be attained in a manner different to that of the private rentier.”
Friedrich List
“The National System of Political Economy” (1841)
https://www.imperiumpress.org/shop/national-system-of-political-economy
Justin
Dec 10 2024 at 8:49am
So far I’m less than five minutes in and two respected economists’ best argument for unfettered free trade is people who don’t trust experts are racist, flat earther rubes. Poor, poor showing.
Justin
Dec 10 2024 at 9:24am
In fairness, after standard litany of the benefits of free trade, that after hearing them since the NAFTA treaty come to sound as predictable as a Catholic Mass, Russ does say that it’s OK to import food, “as long as they aren’t your enemies.”
Well, Holy Obvious Point, Batman! Most of these policies, especially in the U.S. do have some national security nexus. The infamous mohair wool subsidy example of the past comes to mind. Now, do can those become a rent seeking activity after awhile? Certainly. But, nations, as the great quote says, do not have friends, they have interests. The reason WHY, to address the point of the Indiana vs Michigan car manufacturing straw man, is that interests of both states are suborned to national security concerns. Further, at the end of the day both places live within a legal system with a very real combat based capability to compel. That dynamic within the international order, treaties and agreements and dubious appeals to expert authority aside, does no, and likely never will, exist.
Ivan
Dec 10 2024 at 9:39am
Speaking as an engineer that works in aerospace, I see a lot of lost knowledge in manufacturing that does indeed create issues. Now, I am pretty sure that if all manufacturing left the US, that lost knowledge could be regained with a ‘Manhattan project’ style push in the face of an existential threat; however, it most certainly would have the same growing pains it had the first time it was discovered. Engineering is iterative, and those iterations will have to happen again.
Matt B
Dec 10 2024 at 10:55am
This episode covered the basic arguments for free trade, which are hard to argue against: it makes the pie bigger by allowing for better resource allocation and specialisation, capturing the potential of comparative advantages to increase the purchasing power of everyone involved.
Yet Scott and Russ managed came across as tone deaf and blind to life on the ground for real people. Where in the conversation was the discussion about the impact of globalization on intra-national wealth inequality or the potential link between wealth inequality and a stable democracy?
Size of the pie arguments focus on wealth in the aggregate, but not whether it is distributed in a way that is sustainable within a democracy, where one person = one vote.
Likewise, the increases in purchasing power created by free trade surely benefit everyone, but individuals measure their own wellbeing against the lives of their fellow countrymen, not against counterfactual “could be worse” hypotheses – no matter elegantly articulated by economists. Behavioural economics has shown that humans feel strongly compelled to “punish” people who make gains that they do not spread around fairly, even at a personal cost to themselves.
So while free trade increases purchasing power for everyone, if almost all of the increase in the “size of the pie” accrues to a small minority while the vast majority merely tread water, then shouldn’t we expect that majority to tear the system down, consequences to their own purchasing power be damned?
I really think economists need to wake up to the fact that society’s perceptions of relative economic opportunity matter enormously for sustaining a stable, well-functioning democracy. Nationalism and protectionism will not make life better for anyone. So if we want to stay off that path we must find policies that leverage the benefits of free trade to increase economic opportunity (not just purchasing power) for everyone.
Nick Ronalds
Dec 13 2024 at 8:13am
After-tax and after transfers, the income distribution hasn’t gotten more unequal: https://www.econlib.org/library/columns/y2024/cardenincomeinequality.html.
Virtually all the major tech innovations of recent decades has taken place in the U.S. and have created huge new fortunes. Would it be better if they’d happened elsewhere?
Ajit Kirpekar
Dec 10 2024 at 1:50pm
As someone who is pro-trade pro-immigration pro automation, I do think The question of why does this bother people got misinterpreted as essentially economic ignorance.
I would frame it in a rather different way. The problem here is there’s no economic theory that I’m aware of that says with conviction that 100% of the job losses resulting from automation and trade are going to result in 100 or 110 or some percentage equivalent in new jobs. Some of the papers like ones written by Chad Jones paint a universe where automation essentially eliminates 99% of the work but leaves 1% behind for us to do for a few hours while the goods and services everywhere else are cheaper. But that’s a steady state phenomenon. In the meantime, We seem to be relying on past experience to inform us almost on good faith that there will always be plenty of new jobs to fill when the old ones are gone. But again, that’s not a truism anywhere and always as far as I’m aware.
The other issue is new jobs are created, they require sometimes completely different skill sets. Going back to Borjas in his econ talk episode, He wondered who pays for those people to have to re-educate themselves to join the new labor economy? And just how fair is it that they face disproportionate amount of the burden that comes with the trade-offs in trade.
It’s also worth noting that we have a much more rigid labor market than we did in the past and that’s been blamed on government policy, but I suspect a big chunk of it is just the diversity of skills these days. It’s really really hard and not everyone can go from industrial construction to software engineering. As someone in software engineering, it’s painful enough to have to adapt to new technologies and then prove yourself in an interview that you can do those new technologies. I can’t imagine what it must be like for someone who doesn’t have that formal training.
Rebecca (Chicago)
Dec 10 2024 at 5:10pm
Quick fact check @32:00: German-American citizens (in addition to individuals of Japanese and Italian descent) were, in fact, sent to US internment camps in WWII
https://www.archives.gov/research/immigration/enemy-aliens/ww2
https://www.stmarytx.edu/2018/gainternment/
Scott Sumner
Dec 14 2024 at 8:40am
Yes, but the cases were not at all the same. Japanese-Americans were rounded up based on their ethnicity, not because of evidence they were security threats.
Floccina
Dec 11 2024 at 6:42pm
I’ve read a few times that retired people are not spending down their assets but rather are continuing to accumulate more. Does that mean that we should worry less about the deficit?
Rui
Dec 12 2024 at 8:16am
On Michigan and the US still producing a lot of cars – I went to check and it doesn’t appear true – am I looking at the wrong thing? https://fred.stlouisfed.org/seriesBeta/DAUPSA
Domestic auto production is steadily down, and cumulatively down by a factor of 4x in the last 30 years.
abystander
Dec 12 2024 at 7:05pm
It’s a definitional issue. Look at the Dept of transportation information
https://www.bts.gov/content/annual-us-motor-vehicle-production-and-factory-wholesale-sales-thousands-units
The production and sales of passenger cars has gone down. The production and sales of commercial vehicles, which includes compact and conventional pickups, sport utility vehicles, minivans and vans, has gone up.
Stephanie
Dec 12 2024 at 4:47pm
I appreciate this conversation and the defense of free markets in general. But something is missing when it comes to identifying the discontent with international trade. While anti-foreign sentiment has indeed been a classic scapegoat, I’d likewise argue that there is general unease with how large scale our lives are.
https://www.deseret.com/opinion/2024/09/15/ballerina-farm-economy-home-production/
Stephanie
Dec 12 2024 at 4:53pm
I appreciate the conversation and general defense of free markets. However, something is missing regarding the discontent with international trade. While anti-foreign sentiment has indeed been a classic scape-goat, I believe there is also discontent with how large-scale our lives have become.
https://www.deseret.com/opinion/2024/09/15/ballerina-farm-economy-home-production/
Nick Ronalds
Dec 12 2024 at 6:21pm
Bad ideas never seem to die. Hardly anyone understands comparative advantage. Many (most?) graduates of the best colleges think Socialism is a great idea, notwithstanding almost 200 years of failed attempts. So thank you, keep up the good fight. Here’s to hoping your sensible voices make a difference, though you’ll never be able to declare victory.
I’m puzzled though why Scott sees deficits exploding starting in 2016. In Obama’s first term annual budget deficits averaged $1.3 trillion. Even allowing for the financial crisis in ’09, does that justify deficits over a $1 trillion every year of his term? Trump’s first three years (i.e., pre-Covid) averaged $809 billion. Biden’s four years (’21 – ’24 (estimated)) average $1.86 trillion. However one might want to rationalize the numbers the “explosion came before 2016, and went ballistic under Biden.
Mort Dubois
Dec 12 2024 at 8:40pm
“But, I’m asking the question: Is it really that hard to restart industrial know-how in an highly-educated country of world-class, first-rate engineers?”
Yes. Not just hard, impossible. If the factories are gone, what makes you think we would still have engineers? Or that they would know what to do to restart production? You learn how to run a factory in a factory. And in all the factories I’ve ever been in. (and I own one myself), 99% of the knowledge required to operate is not written down anywhere. Factories aren’t just machines and buildings. They don’t stand alone. A factory is a physical manifestation of a complex set of relationships, between suppliers and customers, between market forces and legal regimens, and a bridge between how production was done in the past and how it will be done in the future. Our current industrial prowess is the result of a chain of humans making things that stretches back to the cavemen making flint tools. Break the chain and it’s broken. It would take decades to even begin to relearn what is lost when you stop production. The modern industrial landscape is unbelievably complex. To build one factory, you need the output of thousands more.
Shortly after you asked this astonishing question, you gave a great demonstration of how hard it is to produce sophisticated products: Iran’s substandard missiles. Israel has spent an enormous amount of time and treasure to make sure it has the best missile defense in the world. That happened in factories, and in real world tests, not just engineers making plans. I don’t know much about Israel’s defense industry, but I would guess that Iron Dome is the result of an industrial policy decision to make sure that Israel would have the tools anc capabilities to defend against a missile barrage. If they had waited until an attack to start to figure out how to build the system, well you can guess how that would turn out.
Eric
Dec 14 2024 at 8:52am
Seconded. A certain production line becomes unfunded. The company, to stay in business, retools. The engineers and operators go off to some other production line or even some other company and apply their skills to that new item. A crisis occurs where that specific production line would’ve been useful in producing a product for the crisis. How long to retool another production line or even create a new one to produce that item? How would you entice the engineers and operators back to that production line to produce that original (or perhaps improved) item? How long would it take to train new engineers and operators to support this now “new” system? And is the crisis still ongoing?
This doesn’t mean “keep all production lines in effect forever just in case we need them.” It just means that you can’t turn production around on a dime. Other solutions may present themselves (as later discussed), but for this point, those solutions may be more expensive and perhaps not as appropriate as the “oh, if we only had –X–” solution.
Mathew A
Dec 13 2024 at 6:35pm
I’m for free trade when it’s actually occurring.
For the record, I wish we would enter into free trade agreements with Canada, UK, EU, Japan, South Korea, Australia, and any other friendly developed country that was willing to do it with us. We lower our tariffs to zero IF and when they lower theirs.
But of course too often that’s not what’s happening.
When people say free trade then mean the US should get rid of tariffs even when other countries don’t. That’s not, and we shouldn’t allow it.
Why should we buy all this stuff from China when they won’t allow our companies access to their markets, not to mention the technology theft???
I also submit it would be helpful to have Noah Smith on about his recent blog post looking at how much China is really producing.
Scott Sumner
Dec 14 2024 at 8:34am
Here are some questions for commenters to think about:
Economic theory suggests that protectionism will not meaningfully reduce trade deficits, which are determined by saving/investment imbalances. The Trump/Biden tariffs have not reduced US trade deficits, nor have they boosted US manufacturing. Does that suggest that economic theory is true? If so, why complain that I’m ignoring the working class?
The argument that trade hurts the Rust Belt and the argument that automation hurts the Rust Belt is exactly symmetrical. Both have overall gains to society, but highly concentrated losses. Yet while trade is highly contentious, Congress passes no laws banning the use of robots in factories. If this difference is not due to xenophobia, what is it caused by?
Many of the most important inventions ever made were stolen by Europe from China (gunpowder, printing press, paper, compass, etc.) American industry got its start by stealing industrial secrets from Britain. Today, virtually, all developing countries engage in widespread intellectual theft. What makes China special? Why so few complaints about India? Is the problem the theft, or China’s relative success? Our stock market currently represents 61% of global market cap. America has 4% of the world’s population and roughly 20% of the GDP. How much of the world’s corporate wealth must we have before Americans stop crying that the rest of the world is picking on us? 70%? 80%. Please give me a figure that you think would be “fair”.
If I favor “trading with the enemy”, then why do I currently advocate economic sanctions against Russia, and why would I favor economic sanctions on China if it attacked Taiwan? Have you correctly described my views?
Joe Adamik
Dec 18 2024 at 7:39pm
Regarding the episode on industrial policy and the comment about the farmer being happy about the state of their great grandchildren, there are many of those great grand children that are in bad service jobs now compared to being the owner of a working farm. Is it really better to be a cashier at Walmart than owning your own farm? Yes, that person has the ability to buy more cheap goods than their predecessors (at Walmart), but by many other measures, the lives of these great grand children is much worse.
Shripad
Jan 9 2025 at 8:36am
Peter Theil has this to say in his interview with Bari Weiss
“If you have a multi-hundred billion dollar trade deficit and China ends up with hundreds of billions of dollars that it doesn’t want to spend on US goods or services, it’s only choice at the end of the day is to invest that money in the US. The money gets invested through the banking system, and the banks make money. So in a way, you can think of the Wall Street banks are long the trade deficit. The bigger the deficit, the more money they make. And when the deficits go down, the banks blow up. And something similar happened between 2006 and 2009. 2006, we had an $800 billion current account deficit. And basically, you had to have $800 billion of fake financial products that Wall Street had to sell, where it’s like a triple A rated subprime mortgage bond that some clueless bank in Denmark buys up from the US. At some point, okay, we don’t really want to buy these bonds, and maybe we don’t want to sell goods to the US because there’s nothing we can do with the dollars. The trade deficit, current account deficit collapsed, and then we had the 2008 global financial crisis, which again was at the time centered on the US banks.So there’s a way, maybe these deficits are good, but the sectoral effect in the US is that it really helps certain parts of the US economy at the expense of others. ”
So may be from a USD centered wall street perspective tarifs are a bad idea. But its only from that perspective. May be from any other currencie’s perspective tarifs are a good idea.
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