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Well, the plan of instituting higher tariffs by the White House has been designed, as they say, to raise revenue
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that can help out the US economy in other areas, but there are potential negative impacts to things like GDP and
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wages. Kent Matters is faculty director of the Pen Wharton budget model. They have come out with a new paper looking
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at that side of the tariff story and he joins us right now. Kent, great to talk to you. How are you, sir? Good to be
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here. Thanks. I'm glad to be back. Yeah, this is obviously a very important part
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of the story and correct me if I'm wrong. It feels like it's one that's
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maybe not getting as much attention right now, right? I mean, uh, part of the issue is that a lot of the analysis
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that's being done is really kind of using fairly simple trade models that really are not, uh, capturing kind of
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the full impact of tariffs on the rest of the economy. In particular, there's a
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whole capital flows uh part of the economy as well. As uh as trade falls, uh capital flows typically will fall as
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well. And that means um uh foreigners are buying uh less uh of of government debt. And so in
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particular are it's not just that we are you know buying more goods and services
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of foreigners than they're buying from from us that's known as the as the trade
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imbalance everybody likes to focus on. It's what really drives that is government debt in the United States is
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quite large and what happens is that foreigners typically borrow uh are the lenders I mean to the federal government
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and that creates a demand for the dollar. It makes the dollar stronger. That makes our trade uh uh of goods and
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services look less competitive because they become more expensive. Uh and so what happens when you try to reverse
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that just by trying to tackle the trade deficit. Um what you're also doing is
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you're going to limit um how much of capital flows come into the United States uh uh as well. And so, uh, in
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effect, that is going to, uh, make it just harder for the government going forward to float its federal debt at
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kind of a cheap, uh, at at, uh, essentially higher prices, but a cheaper interest rate. And so, given that we're
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on this explosive path of federal debt, it's just going to make the federal government hard, it's going to make it
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harder for the federal government to continue work this debt policy that we're we're on. And so it's that it's
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it's that capital flows are are currently being missed. So take us through the GDP and the wages component
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uh that could be impacted here. Yes. And it's not going to certainly happen immedi immediately um in the in terms of
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the full egg impact, but there's still it's not small. in particular um in over
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the next five years, we're expecting that uh the economy relative to not having the tariffs would um uh shrink by
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about 1.1%. So the GDP still continues to grow with population, technology and so forth, but um relative to where
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otherwise would be by 2030 we project that it'll be about 1.1% uh a little bit
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lower. Um that is not necessarily terribly uh surprising. Some of the trade models will get up to there, but
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then they don't really distinguish between times. They're just all stating
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that as a longer period um outcome. But the problem is is as you go down the line and particular as you go further uh
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years from now 2034, 2039 and so forth the impact becomes bigger and bigger. Um in particular we're predicting by 204
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you know roughly around 40 I'm sorry roughly around 30 years from now um that
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GDP will be about 7 uh 5% less at 7 and a half% less maybe 8% less depending on some assumptions in our model and as the
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result of that is that um we're talking about significant reduction in GDP relative to say other policies one way
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thinking about this. And by the way, wages uh will fall by over 6% over time. Again, by 2030, we're talking about 1%
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reduction of wages relative to where they otherwise would have been. Um by uh over time, the wages will fall uh even
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more. Um so there'll still be wage growth, per se, but we're not going to
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have the same wage growth. It will be lower than where we otherwise would have been. So I think it's you know it's one
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of those issues that you know you you say okay if this is that distorting what are some alternatives what else could we
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have done and so we basically say let's look at the like what's kind of like the
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most distorting way of raising revenue and that basically would be to increase the corporate income tax alone nothing
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else I mean you might believe in that for progressivity reasons but it's in terms of economic damage by far the most
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distorted and so this is equivalent in terms of revenue of raising the corporate income tax from 21 to
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36%. But in terms of economic damage is actually twice as damaging as that increase in the corporate rate. You
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mentioned about uh the impact on wages. Just how much does the consumer bear the
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brunt uh on on these tariffs? And I guess there is this report looks at it over like a 30-year window that there is
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some difference in terms of what impact will be now in comparison to what we might see 30 years ago and that can
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impact people of different ages in different ways. That's right. So in the short run uh the main mechanism that
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drives things for the first couple of years is actually just the uncertainty. uh that's been well quantified now in
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the economics literature is increase in uncertainty um lowers investment. So we're projecting that this increase
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uncertainty is going to lower investment by about 4 and a.5% um over a year or two. So that that's a
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pretty significant uh drop. Now obviously if the uncertainty gets resolved fairly soon that will change
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but for now it's a fairly significant uh shortrun effect. Um but that we project
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that that uncertainty itself kind of wears off by 2027ish that might be optimistic. Um but
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what could actually happen are things that are not captured by our model. um in particular we're capturing a lot of
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things that haven't been captured but there's still a lot of things in the
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short run. The way I describe short run versus long run in these trade models is
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that you know use a physics analogy. You know you have classical physics and then
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you have quantum physics which is really the superset of all you know of classic
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physics plus more. You know in the short run the entanglement between societ between economies is so
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complex nobody understands nobody has a good model of it just because the proprietary data um that data sets that
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we even have access to they they don't have a lot of the descriptions for example we don't know you have a
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business in the United States it may use 30 different parts or a car 30,000 different parts for lots of different
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places um and just one of those parts being disrupted did could actually lead to you just not being able to to
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produce. Now eventually you might say well that all that production will come back to the United States. And we
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actually assume um a lot of that will happen and we even assume a lot of that will happen very smoothly. Um but even
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with that, you just have this lower demand for government debt and that drives up um uh that just makes things a
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lot more challenging because now all the investment has to in the United States can't depend on foreign uh dollars as
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much anymore. Um and as a result of that, that's going to make just the our government debt path even more uh uh
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challenging. Kent, great to have you with us. Thanks very much for your time. For those that want to wa uh see the
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report, they can go to the Pen Wharton budget model website. Thanks, Kent. Thank you, Kent SMEs, who is faculty
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director of the Pen Wharton budget model.