By coinnews 
0:05 spk_0
Welcome to a new episode of the Opening bid podcast. I’m Yahoo Finance executive editor Brian Sai. Like I always say, this is the podcast that will make you a smarter investor, period. And of course, opening bids sponsored by our friends at Vanguard, a great featured guest for this episode, psyched to talk to Ben Harris, uh, vice president and director of Economic studies at the Brookings Institution.Uh, Ben, so great to see you here, and I should know before we get this going here, uh, the New York Times in 2020 dubbed you quote, the quiet architect of Biden’s plan to rescue the economy. So you’re coming in here hot, there’s a lot to talk about, but before we get into, you know, your thoughts on the economy, what are yourYou know, there’s a lot going on with uh the current administration, Trump administration, with tariffs, um, uh, various other trade policies, tax bill, level set from your perspective. What’s your sense? Let’s start on the tariff front. What’s your perspective on what the administration is doing in terms of trade here?
1:03 spk_1
So I think what the administration is doing in terms of trade is experimenting. It’s seeing how far it can push the US economy. It’s seeing how far it can push US consumers and it’s seeing how far it can push our trading partners. I don’t think it really came in with a hard and fast plan, and this was true in the first Trump administration as well, although the path it has taken is very different. The second time around.You know, when I sort of want to scope the magnitude of the various tariffs, I think the right way to do it is to think about the average tariff charged on US imports. For most of the past 20 years or so, it was around 1.5%. The first Trump administration came in, bumped it up to around 3% through those targeted trade initiatives in the name of national security. And then so it came in with the average tariff rate around 3% because the Biden administration preserved that. And then it went up into like the high 20s. And that was an escalation.We’ve never seen this before in the history of our country. And then I think I realized it went too far, and then backed off all the tariffs other than China and then eventually backed off the tar, the China tariff somewhat. So right now, I think it’s basically experimenting with how far it can go on tariffs. But the experiment hasn’t been working well. There’s a lot of concerns around inflation. There’s a lot of concerns around retaliation. There’s a lot of concerns around corporate investment in the US. We can, we can unpack this if you like, but it’s clear the Trump administration realized it went too far.
2:26 spk_0
Now, as someone that was in the trenches, uh with with President former President Biden, crafting various economic policies, how different is this administration’s approach on trade compared to what your teams are working on?
2:42 spk_1
Oh, it couldn’t have been more different. I mean, the Biden administration on trade effectively adopted the first Trump administration’s approach on trade. It maintained a lot of the tariffs that were put in place, um, and didn’t change many. Now in terms of things like, um,sanctions policy and uh what’s known as economic statecraft. So basically trying to achieve foreign policy aims through economic measures. I think the Biden administration was more aggressive, but in terms of broad-based tariffs, I mean that was not something that the Biden administration wanted to do, um.You know, I think that this the Trump administration has beenFairly aggressive in terms of its authority and right now you’re seeing questions of whether or not it can actually levy broad-based tariffs like it has done working its way through the courts. We still don’t know if it’s legal or not. So it’s not just a question of economic policy, but also legal policy. I just don’t think the Biden administration was willing, was willing to push on those legal constraints as much as this Trump administration has. So night and day in terms of tariffpolicy.
3:44 spk_0
You mentioned at the top and the Trump administration is experimenting here on trade. Do you think it will be an experiment?That will go bad. And I bring this up, well really for a lot of different reasons, but I’m thinking about what Jamie Dimon, of course, JP Morgan’s CEOs just said. He said, quote, the recent tariff of impact has yet to been been felt. What, what will the impact be?
4:06 spk_1
Oh, this experiment is gonna end very poorly.I mean, or, or the economics profession just should just pack its bags and go home. Because, I mean, we have spent, we economists have spent decades warning against this. We saw this in the 1930s with Smoot Hawley when there was another experiment and it led to a much worse recession than we needed in the the 1920s and 1930s than was necessary. But you’ve already seen it go badly. I mean, for a bunch of different reasons. So start talking about the negative effects of tariffs.One, you get this price boost in inflation. The rule of thumb is, uh, every 1% point increase in the average tariff rate, you get a 0.1% increase in core PC inflation. So right now when we saw the average tariff rate go from around 3% up to uh around uh 16%, you’re talking about a 1.3% this point increase in inflation.So consumers will be paying more. That’s a big problem. Second, uh, and we saw this with China, you get these retaliatory tariffs. And in the case of China, it wasn’t just retaliatory tariffs, but also lessen access to critical minerals, which is just decimating for certain US industries. And so export market shrink, that’s bad for US businesses is also weighed really heavily on consumer sentiment. Right now, surveys of consumer sentiment show we’reAround sort of this recession era like view on the economy, um, it’s definitely caused a lot of concern among, among households and spending. um and you lead to this sort of general sense of uncertainty. I think business leaders, I spent a lot of time talking to business leaders, but it also shows up in surveys are basically just standing still in the face of this fantastic uncertainty. So as you see things likeM&A activity is way down. Corporate investment outside the front ring of tariffs is way down. And so overall, this is just a really harmful experiment and it’s just unnecessary. It’s a little unclear what the end goal is. Is the end goal to push manufacturing back in the United States? If that’s the case, there areA lot less problematic ways to do it. You could kind of double down on the Biden administration approach where they use carrots and not sticks, you know, all these subsidies, particularly in the energy sector. But the end goal is kind of unclear. And so that makes it difficult to assess this tariff policy because we don’t really know why it’s being put in place in the first place.
6:30 spk_0
I knew I was talking to you, uh, and a week ago I was talking to the CFO of a Fortune 500 company, didn’t want to be named, and I get it, but they said if tariffs go back.On China, go back to 145%, this country will be seeing close to uh in a range of about 20% to 30% inflation. And I made a note because at the time, like, holy cow, I mean, I’ve never seen anything like that, but from an economist standpoint, is that what we would be looking at here? Because there’s no guarantee these 30% tariffs on China stay in place and they don’t go back up.
7:02 spk_1
Yeah, so it’s really different if we’re gonna have these high tariffs on one country, even if it’s a country that’s a massive trading power like China, then if we have them across the board on all countries. And the reason why you saw markets freak out on liberation Day was because there was no release valve. And so for coming in with 30% tariff.On China, like we have right now. A lot of that impact gets dissipated through what some people call a bank shot. So basically China taking its goods, shipping it to countries like Vietnam, Cambodia, Laos, a lot in Southeast Asia. You know, those countries might slap.I don’t know, a new logo on the good, just these really incremental changes, and then it can can come into the US at much lower tariff rates. If you’re gonna have 50% tariffs on Vietnam and similar tariffs on Cambodia and Laos, there’s no release valve.And so what we have now is in spirit, but not in scope, a very similar approach to what we saw in the first Trump administration, which are China focused tariffs. And there is this release valve, so the economic impact won’t be quite as strong as as we saw in Liberation Day. If we go back to Liberation Day tariffs, a recession is virtually guaranteed.And that’s why you saw the S&P and other metrics just fall so so quickly. Um, but if we’re just focused on China, it means a higher tax rate for consumers, it means, you know, less opportunities for exporting for consumers, um, sorry, less opities for exporting for US uh US businesses, but it isn’t nearly as harmful as we saw in in inApril.
8:37 spk_0
Is there, if tariffs stay at the levels they are now, is that recession still guaranteed?
8:42 spk_1
No.No, I mean, uh, you, you’re gonna see slower economic activity. Consumers will have less money. There’s been a lot of different estimates of the, you know, per household cost of the tariffs. It’s probably around a few $1000 for a middle class family that will slow consumption that will push us closer towards stagflation because not only are you getting this slowdown in consumption, but you’re also getting the higher prices that are attributed to tariffs, um.But I don’t think it’s a guaranteed recession, and you see this with the forecasters. A lot of the forecasters were saying post liberation Day, 50%, 60, 70% chance of recession. I think that’s receded to around 30 to 40% now, so still precarious but not a guaranteed recession.
9:28 spk_0
What is that? What is that first real economic reportban whereYou say, wow, tariffs are really starting to hurt the economy, because right now they, you know, you get a weak consumer sentiment report, it hasn’t really shown up in CPI. I would guess agree with Jamie Dimon, investors are perhaps being a little complacent on what’s going on here with tariffs. Like, what’s the one or two reports that you’re, you’re gonna be like, wow, OK, inflation is here, and I guess I should have taken this seriously a couple weeks ago.
9:55 spk_1
Yeah, that’s, that’s a great question. So the standard answer would have been, well, we’re going to look at the unemployment report, uh, we’re gonna see if this starts showing up in labor markets. Our company is laying off workers, you know, then the household would go ahead and start spending less, um, and then we’d also watch consumption closely. This time around, I’m watching business investment much more closely than I usually would have.Because if businesses are just failing to invest, that also means they’re not gonna want to hire. Uh, that means they’ll be very reluctant to raise wages. And so this could be kind of a unique recession that is kicked off by lack of business investment that leads to less consumption, not the other way around. So I’m watching the the investment numbers really closely in the last GDP report when the economy contracted by 0.3%.Um, you did see some evidence of front running on business investment. So businesses want to get ahead of the, the tariffs, so they’re purchasing equipment and other things that might get tariffs in advance. I’m really curious to see the next GDP report to see if we’re going to see that depressed business investment, because for me that’s kind of the thing that kicks off this recession if one’s going to happen.
11:07 spk_0
And Ben, you know, I, I would love to get your thoughts on this. What has raised, I guess, alarm bells for me.You know, I talked to Walmart CFO right after their earnings, uh, a couple of days ago. So, Brian, we’re gonna raise prices, and in some cases might be up double digits. Uh, and now this all might happen starting at the end of May. Uh, what is the impact, I guess, to the low income consumer if the world’s largest retailers hiking prices double digits because of tariffs?
11:32 spk_1
Yeah, so someone might think I might say, oh, higher prices are the worst outcome and and that that’s far from the worst outcome. The worst outcome for the consumer are shortages. And so we’ve got this economist at Brookings named uh Marta Wasinta, and she does a lot of work on the pharmaceutical industry and what she has pointed out is if we’re talking about branded drugs, you might see these price increases, but there’s a high enough uh profit margin built in there where there wouldn’t be shortages.But the real concern for tariffs on pharmaceuticals, and this is just one example, are that for the generics, the margins are so low that you might start seeing shortages in in in medicine. I mean, that is, that’s a worst case scenario as you can get, uh, and every consumer, um, you know, also either has a worker in their household or, you know, maybe depends on on a worker in some way or another.And so if these tariffs start leading to layoffs, uh, we’ve been very fortunate in the past 5 or 6 years. We’ve had very low unemployment coming out of the recession or maybe the past 3 or 4 years. Um, you know, if you see this sort of bleeding into the labor market, that’s awful news for consumers as well.
12:48 spk_0
All right, hanging with us, uh, Ben, we’re gonna go off for a quick break. We’ll be back, we’ll be right back on opening bid.All right. Welcome back to Opening bid sponsored by our friends over at Vanguard, having a great chat here with Ben Harris, VP and director of Economic studies at the Brookings Institution. And Ben, I know I’m gonna get these comments out there on social media, so I’ll put this to you now. Is there anything that you like that the Trump administration is doing on the economy? To be fair, I mean, they are moving very quick, uh, a lot of folks don’t agree with what they’re doing on tariffs. I mean, you’re painting a scenario where the economy could get really hit, but is there something in there, you said, OK, you know what, maybe that’s all right.
13:28 spk_1
Yeah, so let me give you 3 things, because I don’t want to come off like a partisan hack here. And uh the first thing that I think that they’re doing right, and it manifested in a really ugly way was that they’re taking a hard look at government spending.There is a lot of inefficiency in the federal government. Now, the right way to go about it would have been to lean into the auditing function. We’ve got a massive government accountability office. There are there are inspector generals that virtually every agency, uh, Congress should have played a big role in deciding what spending was efficient and what wasn’t. So I’m not.Not a fan of the Doge effort.
14:06 spk_0
They just leaned itto billionaire Alma. They they leaned it to Elon. Let Elon do it. He’s fine. He donated a lot of money.
14:11 spk_1
Yeah, I
14:11 spk_0
mean,
14:11 spk_1
like Elon, Elon probably understands the automotive market. He does not understand government service. And so while I think that Doge was a tragedy, I think that the Trump administration rightly identified government waste is something which we should take on.The second thing that I think it’s done well is, and we haven’t even started talking about the reconciliation bill yet, which is going to be massive going forward for the rest of the year, was that it did put in place a bunch of incentives in the reconciliation package for the corporate sector to start investing now. And it needs that to offset the negative impacts of its uh tariff policies. So the fact that you can now write off investment and investment in uh in equipment.in structures faster than you could before is good news for the US economy. So I guess cheers for the Trump administration for putting those provisions in. Also on trade policy, I thought that in the first Trump administration, they did a good job of identifying a general strategy for addressing some of the problems in the trading relationship we have with other countries, namely these agency level investigations that take place either atCommerce or US Trade Representative’s office that looks at possible trade violations by other countries and then puts in place a reasonable reaction to that trade, uh, you know, misdeed by our partners. And so it took the right approach, the first administration, I think eventually it’s going to get back to that because it’s going to realize how problematic the tariffs were, but it’s going to take a long time to get there. So that was more sort of complimenting the first Trump administration.Um, but you know, there’s, there’s a lot of problematic things that are going on, including a particular reconciliation bill. I’m happy to talk about that if you like. Well,
15:54 spk_0
I want to get to the tax bill or the big beautiful tax bill, as President Trump calls it. I look at some numbers that the Joint Committee on Taxation put out. This, the, the extending the tax cuts alone could cost or cost 3.7%.$1 trillion and I think back to Moody’s now cutting the US credit rating. I think back to what uh Ray Dalio, Ray Dalio told me earlier in the year on, you know, his concern about the outlook for treasury as we pile on more debt. Like, Ben, where is this day of reckoning, you know, we, you, you and I, I think are around the same edge. We’ve been hearing it for the past 20 years or so, is this the moment, is this tax bill create that moment, the day of reckoning for treasuries and the economy and trust in our in our credit?
16:37 spk_1
Yeah, I, I don’t know if we’re gonna have a day of reckoning or a decade of reckoning. And so I don’t know if it’s gonna happen slowly or if it’s gonna happen quickly. It seemed, if you’re looking back over the past month that there were times when it might happen quickly, you saw these sort of overnight spikes in the tenure, and I think that what we’ve done.I mean, I could talk for three hours about problems with our debt markets, but what we’ve done is we’ve surrendered to a certain extent control over the US economy to foreign central banks and foreign investors. So we’ve got this $30 trillion debt market for US Treasury, about a third of that, so $10 trillion are held by foreigners, about half of that are held by foreign investors, uh, official foreign investors like central banks. What we’re starting to see hints of.Is capital flight from the US. Now, mostly that’s been happening in government debt markets. It’s been happening to a lesser extent in equities, but basically it’s not just that foreign consumers are losing a taste for US goods. I’m less concerned about that. What I’m really concerned about is that foreign investors don’t want to put money in the US anymore. What that means is that if we have to rely on American investors to service our debt.Uh, that means we’re going to have to have a higher interest rate. And so if you start seeing that interest rate creep up towards 5% on the 10 year or even 6% or higher, that means we’re crowding out all this other productive investment. People are putting money in treasuries instead of putting money in corporate investment instead of putting money in the stock market.Um, and that’s just awful news for the US over time. And so there’s this sort of slow drag on the US economy, which is virtually guaranteed if we’re going to take on $4 trillion.06 trillion dollars in debt like we’re about to do with this reconciliation package. But the real threat, the real threat is that this could spark some sort offiscal crisis and that could happen if we get to a debt ceiling where you start seeing default on Treasury securities that could happen if we lose, if investors lose faith in the independence of the Fed. That could happen if you see really stark shifts from foreign central banks away from treasuries, like some sort of official proclamation that we’re not going to buy US Treasuries anymore. And then other investors don’t want to hold them because the market for selling those treasuries goes down. So the real concern is thatThis happens in a matter of weeks rather than in a matter of years, and we get this blow up in the, you know, in the financial
19:02 spk_0
markets. Ben, you mentioned, uh, default risk real quick. What’s the probability that this country defaults on its debt? Is it way less than 25% or is it crept up higher after this Moody’s downgrade? I mean, the stock market took all this in stride, but from my perspective, I, when Moody’s downgrades your credit rating, even though it’s to be expected, uh, that’s a red flag.
19:25 spk_1
That’s a red flag. It’sYou know, the way that I think about it is that there’s a lot of risk in investing in treasuries, but default for US Treasury has not been one of those risks. So investors see.The probability default is being zero. If you buy a US Treasury, there might be inflation risks, there might be currency risks. There are other types of risks, but you’re going to get paid on that asset. If we go from a 100% chance of getting paid on your treasury to 99.8% chance of getting paid on Treasury, that is a massive shift. This is no longer a risk-free asset. This is a risky asset in terms of default risk. And umYou know, that just, that just makes our whole fiscal outlook that much worse. We have to pay more for our debt, which then kind of exacerbates our, our debt imbalance. Um, so, you know, you’re finally starting to see more and more attention getting paid to this. It has implications for credit card rates as implications for mortgage rates. Um, it is, I think, probably the biggest threat to the US economy in terms of actual default.Uh, the only reason we would default is if there was a political misstep. I mean, we are the richest country on earth and there are plenty of assets to pay the coupon payments and the principal on US debt. It would have to be a deliberate decision by policymakers to default on our debt, and I cannot imagine a worse decision than that one.
20:48 spk_0
Leslie, Ben, we always ask our guests in the last few minutes of the podcast for their hot take. And my question for you is this on, on this front, you worked on a lot of different things inside the Biden administration on the economy. What was the one thing that surprised you about the US economy as you crafted a lot of plans and talked to a lot of leaders?
21:07 spk_1
Well, that’s, that’s a great question. Uh, it was a, I mean it was a wild time. I, I got sworn in hours after President Biden was sworn in virtually on a screen just like this. Um, in terms of what surprised me, I think that we were all surprised by the persistence of inflation. Now, there’s a debate in economics as far as what caused that inflation.I think any sort of credible analysis has to point to the bulk of that rise in inflation being to this like once in a 100 year supply shock where people were literally not leaving their houses, ships weren’t on the water, factories were, weren’t running, and that run up in inflation wasLargely but not exclusively attributed to supply shocks. But that surprised me. You know, I think that I wouldn’t have been surprised by 34, maybe even 5% inflation. But the fact that we’re getting up to 7, 8%, sometimes even higher for the CPI, you know, that, that really surprised me. And, and I think we probably would have recommended different things if I knew that was coming. Um, but, you know, certainly don’t expect a once in a 100 year spike in inflation.
22:13 spk_0
We should note, uh, myself nor Ben had anything to do with egg price inflation. We’ll leave it there. How to get that, how to get that in. Ben, how to get it in? Because I’m gonna get it on X. Uh, Ben Harris, uh, VP and director of Economic studies at the Brookings Institution, uh, big fan of your work. Uh, please do. Let’s, uh, let’s keep in touch here.Thanks, Brent.All right, that’s it for the latest episode of Opening bid. Continue to hit us with all of those likes and thumbs up on all the podcast platforms. Wait, the thumbs up on YouTube, thumbs up on YouTube, and of course, uh opening bids sponsored by our friends at Vanguard. Talk to you soon.