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