Tariffic Trump
Debunking Economics - the podcastNovember 20, 2024x
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40:0827.71 MB

Tariffic Trump

At least half of America is elated with its new choice of President.  Money is already flowing into the country, with early gains on the NYSE and the dollar shooting higher in value. Tariffs will be front and centre early in the new Presidency, with Trump describing Tariffs as “a beautiful word” recently. But will it have the intended effect. Could the strength in the dollar wipe out any of the benefits from domestic production? Will higher tariffs add to the cost and drive inflation? Does America have the skills base to manage the onshoring of so much productive capacity? Phil Dobbie and Steve Keen discuss what will happen next in America.

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[00:00:34] Wir werden die Unternehmen zurückbringen. Wir sehen uns heute, als ich überrascht,

[00:00:40] diese empty, olden, beautifulen, steel mille und fabrieren, die sind empty und fallen.

[00:00:47] Einige haben sich in die Hunde zu verabschieden, aber das wird nicht die Verrückung.

[00:00:51] Wir werden die Unternehmen zurückbringen. Wir werden die Unternehmen wiederum reduzieren.

[00:00:54] Wir werden die Unternehmen weiterentwickeln, um die Unternehmen zu machen, in den USA zu machen.

[00:00:59] Wir werden die Unternehmen mit starken Tariften, weil ich glaube,

[00:01:03] die Unternehmen in den USA zu machen.

[00:01:05] Ich glaube, ich glaube, dass Sie sind.

[00:01:06] Ich glaube, dass Sie sind.

[00:01:07] Aber ich kann mich auf Ihre Karriere betrachten.

[00:01:11] Aber ich bin die beste Worte in der Dictionary ist Tarif.

[00:01:15] Und es ist mein Lieblingswort.

[00:01:17] Es braucht ein Publikum-Rollanz firm.

[00:01:22] Aber ich bin die beste Worte in der Dictionary.

[00:01:25] Das ist die Debunking Economics Podcast mit Steve Keen und Phil Dobby.

[00:01:31] Das ist die Worte.

[00:01:33] Das ist die Worte.

[00:01:33] Das ist die Worte.

[00:01:34] In Trump's eyes.

[00:01:36] Shall I compare thee zu a summer's day?

[00:01:39] Aber will es work?

[00:01:40] Trump's tariff plan, oder will es create inflation?

[00:01:42] Oder will es inhibit global trade?

[00:01:44] Oder will es ein stronger dollar actually mean es hurts US exports?

[00:01:47] Wie will es all shake out?

[00:01:49] Has he thought through all of these permutations?

[00:01:52] Well, half of America clearly loves the idea, so it's going to happen.

[00:01:56] What does it mean for the rest of us?

[00:01:58] We'll look at that this week on the Debunking Economics Podcast.

[00:02:06] So Donald Trump wants to impose tariffs on China and the rest of the world, really,

[00:02:10] but specifically China to get businesses to base production within the US,

[00:02:14] rather than outsource overseas where labour is cheaper.

[00:02:18] So Steve, the US imports about 450 billion in goods from China.

[00:02:22] He imposed tariffs of 25% on half of that.

[00:02:26] Now he wants to go 50% on everything.

[00:02:30] I wonder if it's going to work.

[00:02:32] There's only signs that actually people are responding.

[00:02:36] So the CEO of Breville in Australia has said,

[00:02:39] do you know Breville was actually an Australian company?

[00:02:40] I learned that this last week.

[00:02:43] He's known that for quite some years.

[00:02:44] Yeah, well, I mean, so there we are.

[00:02:45] That's great.

[00:02:46] There's Australia, quite a big company.

[00:02:48] Very soon.

[00:02:49] Probably our most successful manufacturing company.

[00:02:52] Yeah, making good stuff and expanding.

[00:02:55] Anyway, the CEO has said that they are already moving

[00:02:58] to their production out of China.

[00:03:00] They're trying to build up their inventory in the United States,

[00:03:04] you know, as much as possible.

[00:03:05] Let's get as much inventory into the country before the tariffs start.

[00:03:09] And then, look, their share price fell 3% on the day that Trump was elected.

[00:03:14] But if they move to the US, then Donald Trump is winning, isn't it?

[00:03:17] His plan is working.

[00:03:19] Yeah, and this is, you know, it's actually, there's been 50 years of American policy

[00:03:24] predicated on free trade being advantageous, which the Chinese exploited very effectively

[00:03:30] to build up their manufacturing capabilities.

[00:03:33] And now, I think it's, except in a few, a handful of industries, China is out-competing America

[00:03:42] across the manufacturing spectrum.

[00:03:44] And this is, you know, in terms of how well the policy has worked, the previous free trade

[00:03:50] policy, the answer is very well for China and not particularly well for America, which

[00:03:54] is the inverse of what you normally expect with policy in the, you know, the economic theory

[00:04:01] said both sides would benefit.

[00:04:03] Well, I think Trump is picking up on the feelings of now we've got to say as the majority of

[00:04:08] Americans, since he won a majority of the popular vote, that this hasn't worked out well

[00:04:12] and we want a reverse direction.

[00:04:14] Yeah, but the price associated with that's the question.

[00:04:17] We'll come to that in a second.

[00:04:18] Let's just finish off with Breville.

[00:04:21] Their CEO said now they're looking at moving to Mexico.

[00:04:23] I guess he thinks that's because Mexico is part of the North America Free Trade Agreement,

[00:04:28] the NAFTA, which would mean that, you know, it would be tariff free into the US.

[00:04:34] But we look at the last Trump administration and in 2019 he said, right, we're going to put

[00:04:40] 5% tariff on Mexico.

[00:04:42] And then each month thereafter, up to a maximum of 25%, we're going to increase it unless Mexico

[00:04:48] takes steps to stop illegal immigration from Mexico into the United States.

[00:04:54] It didn't happen because Mexico said it would try and increase security measures.

[00:04:58] So that was a case of Trump, you know, just doing his whole art of the deal thing.

[00:05:03] But it does show that things like free trade agreements, you know, are not sacrosanct,

[00:05:08] that they can be ripped up at any moment.

[00:05:11] If you move a business into Mexico thinking that you're going to get free trade into the

[00:05:14] US, which could be abolished, that agreement could be abolished after you've spent a fortune

[00:05:20] setting up a factory, it's not safe to draw any conclusions, is it?

[00:05:25] And the only safe one is the one that he's trying to push for, people to move manufacturing

[00:05:29] to America.

[00:05:31] And, you know, on this front, he's, you know, the fact that he's so capricious means that

[00:05:37] you simply can't expect any existing agreements going to be continued with.

[00:05:41] So the only place to, if you want to get into America via voiding tariffs, the only place

[00:05:46] to make this stuff is in the US of A.

[00:05:48] But about, just on Mexico, 80% of their exports go to America.

[00:05:54] So Mexico is hugely dependent on the United States for its own economy.

[00:06:01] If there was a 20% tariff or a 25% tariff, I wonder how much of that would be compensated

[00:06:06] for by the fact that Mexican currency would become so much weaker, whether the peso, I

[00:06:12] mean, curiously, actually, this year, the peso has been climbing.

[00:06:15] It's gone from 16 peso to the dollar to almost 21.

[00:06:19] And the news of the, you know, Trump 2.0 hasn't stopped that climb.

[00:06:23] But I wonder whether, you know, in fact, if you started to see trade diminishing, you'd

[00:06:29] just see the peso massively drop in value.

[00:06:33] And that would negate some of that impact of that tariff.

[00:06:35] Yeah.

[00:06:35] I mean, the currency movements obviously can go in the opposite direction of tariffs.

[00:06:39] So that can make the point.

[00:06:42] I think Trump is still looking at the volume of exports and those volume continued rising.

[00:06:48] They've been continued with the policy.

[00:06:49] So, you know, I don't think, again, I wouldn't respond to this by moving to a country which

[00:06:58] currently has a free trade agreement with America.

[00:07:00] I think if you're going to respond to this, then, you know, the only option is moving your

[00:07:04] production base to America.

[00:07:07] And that's what, and Trump, of course, the other thing he wants to do is encourage American

[00:07:11] companies.

[00:07:11] So it's very nationalist.

[00:07:13] This is the basic point of his administration.

[00:07:15] It's a very nationalist America first administration on everything.

[00:07:20] And obviously, when it comes to trade, he's not going to be happy or his team won't be

[00:07:27] happy if they see the volume of the Mexican exports still rising despite the other measures.

[00:07:32] But what happens if you don't?

[00:07:34] So, I mean, irrespective of whether people move to Mexico or not, I mean, Mexico is currently,

[00:07:38] as I say, 80% of their exports go to the United States.

[00:07:42] If that door gets closed, what happens to the Mexican economy?

[00:07:45] What happens to those Mexican people who all of a sudden can't afford to feed their families?

[00:07:49] What do they do?

[00:07:50] Yeah.

[00:07:50] Yeah.

[00:07:51] And that leads to political turmoil in Mexico, which has had a fair share of that itself anyway.

[00:07:57] Which is their next door neighbor.

[00:07:58] And obviously more and more than then try and make it to the United States.

[00:08:01] Yeah.

[00:08:01] But it depends on how much complexity the country has managed to gain by taking advantage of

[00:08:09] exports to America over time.

[00:08:11] And in that front, China is absolutely the winner because you cut China off from the rest of

[00:08:17] the world to try to do it.

[00:08:18] And it's going to say, okay, we'll just continue developing for our domestic production and

[00:08:23] consumption base.

[00:08:25] Because you have to have been to China before this whole transition occurred to appreciate

[00:08:33] how dramatically the country has been transformed into a manufacturing powerhouse.

[00:08:39] Because in 1981, 82, I was visiting Chinese factories with a group of Australian journalists

[00:08:47] I took there for a conference with Chinese journalists.

[00:08:49] And we were going inside factories making incandescent light bulbs.

[00:08:56] And it was hand assembly.

[00:08:58] It was incredibly primitive stuff.

[00:09:00] And the same for some of its gas, its projects in the countryside.

[00:09:07] Methane from pigs being used to power a local production facility.

[00:09:14] That itself was not a bad thing.

[00:09:16] But the level of technology was just way, way, way behind.

[00:09:20] Yeah.

[00:09:21] Although they are stepping it up.

[00:09:22] You go there now.

[00:09:23] Yeah, stepping it up now.

[00:09:24] You feel like you've gone to a, you know, either when you're at Disneyland or you've moved

[00:09:30] to Star Trek.

[00:09:31] I mean, the quality of manufacturing and the infrastructure in China is just stunning.

[00:09:37] And that's just in a 40, 45, five-year period.

[00:09:39] Yeah.

[00:09:40] But what they are having the problem with, though, is, you know, that move to domestic

[00:09:46] demand.

[00:09:46] They are producing a surplus of goods, always have, still exists today, because they are,

[00:09:53] you know, hell-bent on exports.

[00:09:55] So if they, this transition to domestic consumption is proving very difficult for them.

[00:10:00] I think they'll still manage it.

[00:10:01] I mean, because it's the level of consumption of Chinese people now is, you know, orders of

[00:10:09] magnitude.

[00:10:09] And that is maybe two orders of magnitude improvement, certainly one, over the last 40 years.

[00:10:18] It's dramatic how much more consumption Chinese people are used to compared to what they had

[00:10:25] back in the days of the, you know, the Mao regime.

[00:10:28] So don't underwrite the capacity of Chinese consumers to consume.

[00:10:33] But, well, it's just taking a while.

[00:10:35] That's all.

[00:10:35] And meanwhile, I mean, China's approach, obviously, would be to try and weaken the yuan as much

[00:10:40] as possible.

[00:10:41] Export nations want a lower value, obviously, in their currency to make their exports even

[00:10:46] cheaper.

[00:10:46] So if the dollar strengthens and all other currencies weaken, because that's what's got to happen,

[00:10:52] if the U.S. dollar strengthens, then everyone else has got to be down or, you know, at least,

[00:10:55] you know, the constituent parts of the DXY, depending on how you're measuring the strength

[00:10:59] of the U.S. dollar.

[00:11:01] Then, you know, it becomes cheaper to import in the United States and more expensive to

[00:11:06] export.

[00:11:07] So is that really a win for America?

[00:11:08] Well, I mean, America needs to revive what it used to have in terms of a manufacturing

[00:11:15] capability.

[00:11:16] And, like, whenever I get involved in the discussion of trade, the first thing I turn

[00:11:20] to is the Atlas of Economic Complexity System, which is run by Harvard University and uses

[00:11:26] a set of computer statistical devices to measure how sophisticated a manufacturing system a country

[00:11:34] has.

[00:11:35] Now, America back in 2000, that's not long ago.

[00:11:40] I wish the database went further back on that front.

[00:11:41] But in 2000, America ranked number six in the world.

[00:11:46] It now ranks number 14.

[00:11:48] If you take a look at China over the same time period, China is going to type in its name

[00:11:53] here in the system.

[00:11:55] China was number 39 in 2000.

[00:11:59] It's now number 18.

[00:12:00] So a few more years of the current trend and China will rank as more sophisticated in

[00:12:06] terms of the goods it can produce than America, which is the world's top nation.

[00:12:09] Now, what country do you think holds the number one position?

[00:12:13] Oh, gee, I don't know.

[00:12:14] That's an interesting one.

[00:12:15] Japan?

[00:12:16] Yes, and it's held consistently for the last 21 years.

[00:12:21] So the Economic Complexity Index, number one since 2000 right out of 2021, is still Japan.

[00:12:27] So the idea being that the more industry, and we've talked about this in the past, the more

[00:12:32] industries you've got, the more cost fertilization between those industries.

[00:12:36] Therefore, the opportunity for new initiatives to be developed.

[00:12:40] You get a more innovative culture.

[00:12:41] That's right.

[00:12:42] Yeah.

[00:12:43] And then as China's going, at some point, like in the next three or four years, it'll pass

[00:12:47] America in terms of its capacity to produce complex goods.

[00:12:51] And of course, one of the most important ones there is integrated circuits.

[00:12:54] If the trade embargo that America's put on China already means that China develops its

[00:12:59] own equivalent of AMSL, then the Dutch company that dominates, well, is the only, Frankfurt

[00:13:06] dominates, it's the only company that makes devices that can make the smallest scale of

[00:13:10] microchips.

[00:13:11] If they produce that, then China becomes dramatically self-sufficient here.

[00:13:16] And that's my long-term perspective that with what I expect from climate change and its impact

[00:13:23] upon global economies, the capacity to produce what you need domestically is absolutely critical.

[00:13:28] The days of focusing upon globalization, I think, are over.

[00:13:33] And in that sense, you know, I'm not dismayed by what Trump is trying to do on that front for

[00:13:41] America because given what's coming out, what's going to be each country for itself.

[00:13:46] And the more you can produce of your own needs, the less likely you are to have a collapse

[00:13:50] caused by climate change.

[00:13:51] Well, it has started to happen a little bit, hasn't it?

[00:13:53] As a result of, you know, what we saw with the pandemic and the shock that that produced

[00:13:57] to supply chains.

[00:13:58] I think every company realized the need to shorten those supply chains and more on shoring.

[00:14:04] But just let's just finish off before the break on this on this idea of the currency,

[00:14:07] though, because if America, which, you know, has been a big import, big net importer, all

[00:14:14] of a sudden, I mean, I don't think it'll ever get to the stage where it's it's exporting

[00:14:19] more than it imports.

[00:14:20] But if it gets closer to it, then we are going to see a response in the US dollar, aren't

[00:14:26] we?

[00:14:26] The US dollar is going to rise.

[00:14:28] It's up almost 7% anyway, over the last 12 months.

[00:14:32] That's before Donald Trump's got his feet under the desk.

[00:14:36] And, you know, so maybe it's going to be 10, 15% up.

[00:14:40] And that does sort of negate, you know, we're looking at 20% tariffs around the world.

[00:14:45] That sort of negates the impact of those tariffs.

[00:14:47] So what does he do?

[00:14:48] He says, well, look, I'll put the tariffs up even more than, you know, it's because obviously

[00:14:54] currencies have to level out.

[00:14:56] The only way out of the value currency for America is to see us being a country, the

[00:15:00] global reserve currency.

[00:15:02] This is the main problem.

[00:15:04] The fact that the American dollar, the Bretton Woods, insisted that the American dollar become

[00:15:11] the reserve currency rather than Keynes' idea of a clearinghouse using what he called a bank

[00:15:16] hall, inevitably meant that the American dollar has to be overvalued because every country

[00:15:20] on the planet needs to have American dollars to engage in trade, whether or not they're buying

[00:15:25] American goods.

[00:15:26] And that's necessarily was an advantage for the American financial system and a disadvantage

[00:15:31] for the manufacturing system.

[00:15:34] So the real way...

[00:15:34] One in 10 transactions, I think I read somewhere, one in 10 transactions with the US dollar actually

[00:15:38] involves the United States.

[00:15:39] But do you think the US would relinquish that position?

[00:15:43] Certainly not under Trump.

[00:15:44] I mean, you know, again, the whole...

[00:15:46] But if he's got a rising dollar, if he's hit with a problem that his policies are causing

[00:15:51] the US dollar to get stronger and stronger by the day, and that's negating the effect

[00:15:55] of his tariffs, then he's got a problem, hasn't he?

[00:15:58] Absolutely.

[00:16:00] So what does he do about that?

[00:16:01] Your guess is as good as mine on what Trump will do.

[00:16:03] But yeah, it's...

[00:16:04] Puts tariffs up even more, I guess.

[00:16:06] It's it, most likely.

[00:16:07] I mean, it's inevitable.

[00:16:08] It's a problem which if you...

[00:16:09] There is...

[00:16:10] It's easy for a country that's not the reserve currency to whack up tariffs and not have a

[00:16:15] particularly dramatic effect upon its exchange rate.

[00:16:18] But America does it.

[00:16:19] And, you know, the reserve currency also, which necessarily has to run a trade deficit

[00:16:25] to enable those dollars to turn up in foreign countries for them to be able to re-import back

[00:16:34] in America, they're caught both ways.

[00:16:39] There's no way they can do one without the other moving in a compensating direction.

[00:16:44] But it doesn't help innovation from American point of view.

[00:16:49] It's sort of backward looking to say jobs that have gone overseas for companies that are

[00:16:54] trying to serve our domestic market, we want those jobs to come back.

[00:16:57] The price we're going to pay for that is...

[00:17:00] Well, first of all, those goods are going to be more expensive.

[00:17:02] We'll come to that after the break.

[00:17:03] But the other thing is we're going to have a strong US dollar as a response of that.

[00:17:06] The effect of that is for anybody in the US who's exporting, all of a sudden the cost

[00:17:10] of US goods become more expensive.

[00:17:12] It becomes an expensive place to create goods for the rest of the world.

[00:17:16] So the innovator will say, well, OK, the US is the last place in the world I want to be.

[00:17:22] So, for example, you know, everything that Microsoft or anybody else produces all of a sudden

[00:17:26] goes up 10% just by exchange rate fluctuations.

[00:17:31] There's no...

[00:17:32] It's a dilemma.

[00:17:33] There's no easy way out of it.

[00:17:35] He's going to find out about the hard way.

[00:17:37] Yeah.

[00:17:37] Do you think he's thought about it?

[00:17:38] I don't think he thinks that far.

[00:17:40] No.

[00:17:40] No, I'm sure he hasn't.

[00:17:41] All right.

[00:17:41] OK.

[00:17:41] I wonder if he's thought about inflation as well.

[00:17:43] We'll talk about that because that's the one thing obviously everyone is pointing to.

[00:17:46] This is going to be inflationary.

[00:17:48] And, you know, what's the Reserve Bank going to do about that or the Federal Reserve?

[00:17:51] We'll look at that when we come back.

[00:17:53] It's the Debugging Economics Podcast.

[00:17:55] We are talking about terrific, get it, Trump on the show today.

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[00:19:25] This is the Debunking Economics Podcast

[00:19:27] with Steve Keen and Phil Dobby.

[00:19:33] So Steve, if manufacturing is brought back into the US,

[00:19:37] I mean, I wonder how much it is going to help America

[00:19:40] where the average wage is more than four times what it is in China,

[00:19:46] six times what it is in Mexico.

[00:19:48] So say the average value of a good is 30% of its cost is based on labor.

[00:19:53] So something that costs $100 from China could cost twice that amount in the United States

[00:19:59] if it's produced in the United States.

[00:20:01] So actually, people would still find it cheaper to buy that good from China

[00:20:04] unless the tariff on Chinese goods is 100%, doubling the cost.

[00:20:11] There are also other issues, which are about the level of markups.

[00:20:14] So a large part of the increase in inflation in recent decades has been by firms increasing their markups

[00:20:20] by more than the rate of inflation.

[00:20:22] It's not just wages that cause a higher level of costs.

[00:20:25] So you've got huge profit margins, a part of the cost of them buying goods in America

[00:20:32] as well as the wage levels.

[00:20:34] I don't know what the comparable situation is in China,

[00:20:37] but the odds are that another way that American manufacturing could compete

[00:20:42] is by reducing their markups.

[00:20:44] So it's not totally fixed that with a high wage cost you can't compete.

[00:20:49] And the main thing is it's not high wage, it's low skill.

[00:20:53] I've come back to – I've forgotten the particular executive who was running Apple at the time,

[00:20:58] but his comment about if he wanted to have a meeting of all the machine tool –

[00:21:03] skilled labour for machine tools in America, he'd hold it in his boardroom.

[00:21:07] If you wanted to hold the thing inside, say in China,

[00:21:09] you'd need the world's biggest football stadium.

[00:21:12] So the level of skilled labour and the capacity to mechanise is something that's –

[00:21:18] again, it should be higher in America, but in fact it's higher in China.

[00:21:22] So what this – a large part of the way to –

[00:21:24] So you can't bring those jobs back.

[00:21:25] The people don't exist to do them.

[00:21:27] The skill set doesn't exist to do them.

[00:21:29] Not in America.

[00:21:29] And that's the trouble.

[00:21:30] They haven't – you know, the education is another barrier for any development like this in America.

[00:21:36] And you used to have, you know, apprentice type training,

[00:21:40] which I think the Germans are still relatively good at that.

[00:21:43] They left everything else in their industrial system.

[00:21:45] But the role of an apprenticeship and training on site

[00:21:50] and then development of technology and training of staff to match with it,

[00:21:54] the Chinese seem far in advance of America on that front

[00:21:57] because they're investing in their people rather than trying to exploit them,

[00:22:01] which is the main American activity.

[00:22:02] Yeah.

[00:22:03] Well, therein lies the problem as well then.

[00:22:05] So you could say, well, okay, this is a two-step process.

[00:22:08] We need to bring these jobs back on shore.

[00:22:10] And to do that, we need to skill up so that we can replace the jobs

[00:22:13] that we've outsourced to China and develop those skills nationally.

[00:22:16] Therefore, we need to spend money on education.

[00:22:19] Ah, damn it.

[00:22:20] We've just appointed Elon Musk who's just said he's going to reduce government spending by a third.

[00:22:29] Two things don't add up.

[00:22:30] I think a lot of stuff doesn't add up on what they're going to be attempting to do.

[00:22:34] I mean, knocking $2 trillion, that's 10% of the bloody economy pretty much.

[00:22:40] I know, but don't worry because those people, obviously,

[00:22:43] who were working for the government will now be freed up to work in private enterprise

[00:22:48] and are more curious why they chose the government in the first place.

[00:22:53] Yeah, I know.

[00:22:54] Because from that very low unemployment rate that he's got,

[00:22:57] he's going to get it into negative figures.

[00:23:00] That's after, of course, you got rid of the 2 million people who are going to be deported.

[00:23:04] Yeah, none of it stacks up.

[00:23:06] And none of it stacks up.

[00:23:06] It's going to be fascinating to watch.

[00:23:08] I mean, it's popcorn territory for the rest of the planet.

[00:23:10] So when you talk about the margins, as you were saying,

[00:23:13] so, you know, the idea that really to compensate for the lower labor costs in China,

[00:23:20] you'd have to, you basically could be doubling the cost of every item.

[00:23:24] Okay, this margin, you might not be quite so bad because you get margin squeezed.

[00:23:30] Because as you say, there might have been massive margins that have been happening in the United States.

[00:23:34] But you see, Donald Trump will be a big supporter of that

[00:23:36] because those massive margins have been helping the share price.

[00:23:40] And the share indices are what Donald Trump measures as the success of an economy.

[00:23:46] Nothing else, just how share prices are going.

[00:23:48] So they've been going well because companies have been giving very big profits

[00:23:51] because of those profit margins that you're talking about.

[00:23:53] So I don't know if he's thought that through either.

[00:23:55] Those profit margins could well get squeezed and their share prices fall.

[00:24:01] Yeah.

[00:24:02] It's, I mean, embracing myself what's going to happen on Twitter again,

[00:24:07] because one of the reasons I was active on Twitter was watching,

[00:24:10] what the hell is Trump going to do next in the last term?

[00:24:13] It's going to be that on steroids this time around.

[00:24:16] And of course, accompanied by Musk as well.

[00:24:20] So we're going to see whatever dilemmas they have,

[00:24:23] we're going to be seeing very publicly on Twitter.

[00:24:26] So you've turned, it seems like in the last 20 minutes or so,

[00:24:28] you've turned around a little bit.

[00:24:30] You were at the very beginning, you were very supportive of what he was trying to do.

[00:24:33] Well, no, I'm supportive of the concept,

[00:24:36] because this comes back to the academic obsession with free trade,

[00:24:41] and that's something I've always been a critic of.

[00:24:44] And in that sense, if Trump's going to snub his nose,

[00:24:48] that's an improvement.

[00:24:49] But at the same time, you've got all the dilemmas that he's doing other,

[00:24:53] if he's going to try to promote trade while also expanding government money creation,

[00:24:58] then that would actually be more feasible.

[00:24:59] You'd be creating the money that could enable colleges to be formed

[00:25:02] so he could train people, he could get apprenticeship schemes and so on.

[00:25:06] Because they're going to try to cut back on all that

[00:25:08] and say it's just coming down to the private sector,

[00:25:10] they're going to be hitting the economy.

[00:25:12] If he actually does write an up $2 trillion off with a 10% fall in GDP,

[00:25:17] if they're lucky, that's not the circumstances in which firms invest.

[00:25:22] So a lot of what they're doing is counterproductive.

[00:25:25] But getting away from the obsession with free trade

[00:25:28] is something that I think is necessary.

[00:25:30] And as crazy as Trump is on the fronts,

[00:25:34] he is a sceptic on that.

[00:25:35] And he's got every right to be a sceptic

[00:25:37] because when you take a look at the arguments in favour of free trade,

[00:25:40] it's more theories at the bottom of the garden thinking by conventional economists.

[00:25:45] And that goes right back to Ricardo's original arguments for it.

[00:25:48] But he is going to, obviously,

[00:25:49] he imposes tariffs, he's going to start a trade war.

[00:25:52] So Europe isn't, Europe's not going to say,

[00:25:56] well, OK, we'll take that 20% tariff, but we'll raise you 20%.

[00:25:59] In fact, I would imagine Europe would say,

[00:26:01] well, we're going to charge you 20%.

[00:26:03] By the way, it seems like you're not particularly interested in climate change.

[00:26:07] So you are producing, your export goods are produced

[00:26:10] without any impost on the effects of climate change.

[00:26:14] You are not meeting your contractual obligations

[00:26:19] as a good citizen of the planet on that.

[00:26:21] So we're going to actually increase our tariffs on that as well.

[00:26:26] So there's no doubt there'll be a trade war from all of this.

[00:26:29] But the thing, what worries me is the trade war will be blamed

[00:26:33] for the collapse on economic output.

[00:26:36] But at the same time, the economic output collapse

[00:26:38] is more likely to be caused by crushing government money creation,

[00:26:42] which is what is the major objective that Musk has,

[00:26:45] is now the head of the Department of Government Efficiency,

[00:26:48] otherwise known as DOGE.

[00:26:50] So that's going to trash the economy that way.

[00:26:53] And then what'll be blamed for the trashing of the economy

[00:26:55] is the trade collapse.

[00:26:58] But at the same time, with what's coming with global warming,

[00:27:01] I think the only way that a country is going to have any chance of surviving

[00:27:05] is by being self-sufficient in the absolute essentials

[00:27:11] for human consumption.

[00:27:13] And in that front, it's going to be countries

[00:27:16] which are domestically self-sufficient that matter.

[00:27:19] So if all countries turn towards that as an orientation

[00:27:21] rather than towards free trade and extended supply chains,

[00:27:26] as we saw before COVID,

[00:27:28] as weird as a way is to get to it,

[00:27:30] that's actually more sustainable in the long term

[00:27:32] than relying upon globalisation.

[00:27:34] So maybe a tariff war is a good thing

[00:27:36] if it forces the US and Europe and parts of Asia

[00:27:40] all to become much more insular in their outlook.

[00:27:44] And Britain just needs to rejoin Europe as quick as possible.

[00:27:46] So we're not trying to do everything on a very small...

[00:27:50] Yeah, there's a minimum scale to which you can go.

[00:27:53] But I want to just actually read into the record

[00:27:55] the original Ricardo argument for comparative advantage

[00:27:58] because this is the core, I think,

[00:28:01] of where mainstream economics comes from

[00:28:04] and its fallacies at the same time.

[00:28:06] And this is from page 135 of Ricardo's Principles.

[00:28:11] And he made the comment...

[00:28:13] What he was doing was attacking...

[00:28:16] Ricardo's objective in putting forward

[00:28:18] the theory of comparative advantage

[00:28:20] was to attack the corn laws.

[00:28:22] And the corn laws prevented the importing of wheat fundamentally

[00:28:26] from the European mainland into the UK,

[00:28:29] which meant large profits for English-based wheat producers.

[00:28:37] And Ricardo's argument was that

[00:28:40] that means money goes to landlords

[00:28:42] who are going to waste it on frivolous expenditure.

[00:28:44] Whereas if you cut the...

[00:28:46] If you allow the importation of European grain,

[00:28:49] that will reduce the cost of feeding the workers.

[00:28:53] The workers will still get the same amount of grain

[00:28:55] or just cost the capitalists less to do it.

[00:28:57] They'll pay less to the landlords

[00:28:59] and there'll be more investment.

[00:29:00] So Ricardo's orientation was actually

[00:29:03] to increase domestic investment

[00:29:07] and the focus upon the importance of manufacturing.

[00:29:10] What's wrong with that?

[00:29:11] Well, the thing is, the way he made the case,

[00:29:14] most people have fallen for what I call a shell and pee trick.

[00:29:17] So what he said was that you take the example

[00:29:20] of where Portugal is more efficient than England

[00:29:22] in both wheat production and wine production.

[00:29:25] I think it's cloth production.

[00:29:27] He used cloth production and wine production.

[00:29:29] And so the argument was for the opponents of deregulating

[00:29:34] was that if you deregulate,

[00:29:36] Portugal's better at everything than we are,

[00:29:38] so it'll wipe out domestic manufacturing.

[00:29:40] And what Ricardo said is,

[00:29:42] well, I'm going to assume that Portugal

[00:29:44] is better at both wine than cloth.

[00:29:45] So it takes England 100 men

[00:29:50] to make a certain amount of cloth,

[00:29:53] where it takes Portugal 90.

[00:29:55] And then if you look at England trying to do wine,

[00:29:58] it'd be 120,

[00:30:00] where Portugal can do it with 70.

[00:30:04] Then if the British stopped producing wine,

[00:30:11] because he actually knew they didn't,

[00:30:12] he made a little facetious comment about that

[00:30:14] in the book,

[00:30:15] and they devote all their capital to producing cloth.

[00:30:19] And then Portugal stops producing cloth

[00:30:22] and devotes all its resources to producing wine.

[00:30:25] There'll be an increase in the amount of cloth

[00:30:27] and the amount of wine in aggregate,

[00:30:28] and everybody will benefit.

[00:30:30] And that's the argument for comparative advantage in trade.

[00:30:34] But Ricardo got what he wanted,

[00:30:36] which was to reduce the cost of labor

[00:30:38] and to enable more money to go to capitalists

[00:30:41] and less to go to landlords.

[00:30:42] That's his real objective.

[00:30:43] But people fell for this argument.

[00:30:45] And the problem is that you don't just make those commodities with labor.

[00:30:50] You need machinery as well.

[00:30:52] And what Ricardo did is the classic case

[00:30:55] of confusing monetary capital with physical capital.

[00:30:59] So he talks about why is this going to be advantageous

[00:31:02] to expand trade with Portugal

[00:31:06] versus expanding domestic production.

[00:31:08] And he says, this is a quote,

[00:31:10] the difference in this respect between a single country and many

[00:31:12] is easily accounted for by considering the difficulty

[00:31:15] with which capital moves from one country to another

[00:31:18] to seek a more profitable employment

[00:31:20] and the activity with which it invariably passes

[00:31:22] from one province to another within the same country.

[00:31:25] But that's true if you're moving a sheep dip or a spinning jenny

[00:31:29] from some location in Scotland to another location in England somewhere,

[00:31:34] making a physical capital.

[00:31:36] That's easy.

[00:31:37] It's easy to move the monetary capital.

[00:31:39] It is not easy to turn a spinning jenny into a wine press.

[00:31:44] And this is the physical aspect of capital

[00:31:46] that's ignored by neoclassical theory all the time.

[00:31:49] It's the physical resources you need to produce,

[00:31:52] the physical goods.

[00:31:52] They leave out the impact of capital.

[00:31:56] The only way you're going to get new capital is to invest.

[00:32:00] It's not a case of allocating your existing capital more efficiently,

[00:32:04] which is the whole focus of comparative advantage.

[00:32:07] It's increasing the physical resources you have.

[00:32:10] So this is just a fallacious argument.

[00:32:13] It should never have been taken seriously.

[00:32:15] But the fundamental driver of improving trade positions

[00:32:19] is increasing investment, not relocating existing physical capital

[00:32:23] because you can't move physical capital from cloth manufacturing

[00:32:29] to wine manufacturing or anything.

[00:32:31] And you'd assume that Donald Trump is going to see much greater investment now

[00:32:34] in the United States because...

[00:32:35] That's what he wants, yeah.

[00:32:36] ...he has a market.

[00:32:37] Yeah.

[00:32:37] We've got the market.

[00:32:38] We've got all these people.

[00:32:39] They've all got money.

[00:32:40] They're all going to buy stuff.

[00:32:42] We are going to stop importing stuff.

[00:32:45] Therefore, we need to ramp up our domestic production capability.

[00:32:49] So invest now.

[00:32:52] But, I mean, at what expense?

[00:32:54] I mean, does all the world's money go into the United States

[00:32:56] as part of this experiment,

[00:32:57] which means there's massive underinvestment elsewhere?

[00:33:00] It just means American corporations won't be offshoring anymore.

[00:33:04] And this is why China built itself up.

[00:33:06] I've got to go back to my experience in China 40 years ago.

[00:33:09] We went to the Shenzhen Free Trade Zone

[00:33:11] while they were laying the concrete.

[00:33:13] So it was literally before the thing actually opened up

[00:33:16] and had a meeting with the managers

[00:33:18] who were the most impressive people I met in China.

[00:33:21] And their argument was there's a loophole in the American trade agreement

[00:33:25] that allows an American corporation to export semi-finished goods

[00:33:30] to a third world country,

[00:33:32] have it worked on there and re-import

[00:33:34] without paying a tariff on the extra work.

[00:33:36] So this is a weakness in the tariff system,

[00:33:39] a deliberate weakness to benefit third world countries

[00:33:42] back in the 80s and 90s.

[00:33:44] And the Chinese said, we're going to take advantage of that.

[00:33:46] But to get American corporations to move to the free trade zone

[00:33:52] and we're also going to require them to have a Chinese partner

[00:33:55] and the Chinese partner has to own 50% of the business within seven years.

[00:34:00] Now that gives you an idea of the scale of drop in wage costs

[00:34:04] that was a real motivation for that relocation of production.

[00:34:07] So if all of that's being reversed,

[00:34:08] now obviously the cost of wages has gone up in the United States.

[00:34:11] The issue actually is Mexico, which is wages are very low.

[00:34:15] So the question is, are they going to find that they have to

[00:34:18] just shift production from China to Mexico,

[00:34:21] which is where we get back to where we started with perhaps Breville is right,

[00:34:26] because they are not going to have the workforce in the US.

[00:34:31] And if the response to that is, well, we don't need the workforce

[00:34:35] because we are bringing these companies back

[00:34:37] and because there's not enough labour,

[00:34:39] and because labour is so expensive,

[00:34:41] we're going to have to automate.

[00:34:43] So you're going to have far, you know,

[00:34:45] we're going to have to buy in the machines

[00:34:46] for us to be, strangely, from China actually.

[00:34:49] Interestingly, that was one of the things that was tariff-free

[00:34:53] in Trump's last term was, you know,

[00:34:56] anything that helps us produce domestically.

[00:34:57] We won't put tariffs on that.

[00:34:59] But I wonder whether he will this time around.

[00:35:01] But anyway, those machines come into the United States.

[00:35:05] Those machines are replacing people.

[00:35:07] So actually he's, you know, he's arguing that this is to,

[00:35:09] you know, to get jobs for the Rust Belt.

[00:35:12] But, you know, he got unemployment when he was around last time,

[00:35:15] down to three and a half percent.

[00:35:16] There's not, you know, in theory,

[00:35:18] there's not that many people looking for work.

[00:35:20] If jobs get replaced by machines,

[00:35:24] he's not really helping those people in the Rust Belt, is he?

[00:35:26] Unless he sticks the machines in the Rust Belt, you know,

[00:35:29] and employs the person who turns on in the morning.

[00:35:31] Well, you need some skilled labour to go with those technologies.

[00:35:35] There's also a lot of unskilled labour,

[00:35:37] which can be relatively easily trained.

[00:35:38] I can imagine what Musk is thinking about

[00:35:40] is his army of robots coming into that area.

[00:35:44] But, you know, the overall objective is to rebuild American manufacturing.

[00:35:51] And, you know, having spent some time in America recently,

[00:35:54] it needs it.

[00:35:57] So whether the policies work or not,

[00:35:59] I can understand the emphasis and motivation.

[00:36:03] Yeah.

[00:36:03] And, but of course, it's going to be,

[00:36:06] it'll be done in the usual chaotic sense that Trump brings to anything.

[00:36:10] The days of easy negotiations and slow change to regulations are over.

[00:36:16] And the other side of it is, which we touched on,

[00:36:19] is this lack of understanding about how money is created.

[00:36:23] So if they're scooping money out from the federal government,

[00:36:26] and then they're putting all the responsibility to the state governments,

[00:36:28] who obviously can't create money.

[00:36:30] So, you know, California,

[00:36:34] so the states, California's got a $200 billion budget.

[00:36:37] 70% of that goes on health and human services.

[00:36:41] There's almost $100 billion on education.

[00:36:44] So, and, you know, there,

[00:36:45] 20% of the state's GDP is state government spending.

[00:36:49] So all the, all the important stuff,

[00:36:53] health, education rests with the states.

[00:36:55] Defense rests at the federal level.

[00:36:58] Obviously, he's not going to scoop any jobs

[00:37:01] or any spending out of, out of the military,

[00:37:03] which I think is about a third of all the government spending.

[00:37:08] So, yes, so there's going to be more focus

[00:37:11] on meeting obligations at the state level.

[00:37:14] And obviously the state level can't create money.

[00:37:16] Yeah.

[00:37:17] And they're also going to be probably starved of funds.

[00:37:18] I expect in terms of the administration

[00:37:21] have to put up their state taxes.

[00:37:23] So, yeah.

[00:37:24] And it's, you know,

[00:37:25] as I said,

[00:37:25] it's popcorn territory for the rest of the world

[00:37:27] as these policies are tried out.

[00:37:29] Like at a fundamental level,

[00:37:30] I still think you have to have more domestic production

[00:37:34] because I think globalization is,

[00:37:36] it's already going backwards

[00:37:39] by the fact that it hasn't led to the increase

[00:37:42] in the income levels of the wealthy countries

[00:37:45] that thought they would benefit from globalization.

[00:37:47] This is America's situation in particular

[00:37:50] because a major argument in favor was,

[00:37:52] let's specialize in what we're best at now.

[00:37:54] That'll increase our incomes

[00:37:56] of both the importing and the exporting nations.

[00:37:58] Well, America's been doing pretty badly on that front

[00:38:01] and China's been doing pretty well.

[00:38:04] So, there's,

[00:38:05] that alone is causing,

[00:38:07] even though the people still swallow

[00:38:09] conventional economic theory on this front,

[00:38:11] the level of satisfaction with that,

[00:38:13] the outcome is definitely not what it was supposed to be

[00:38:16] because the outcome has been the opposite,

[00:38:18] you know,

[00:38:18] declining living standards in America relative to China,

[00:38:23] whereas they're both supposed to benefit.

[00:38:25] So, that alone was a problem.

[00:38:27] But with global warming is going to cut off,

[00:38:30] if we think COVID broke supply chains,

[00:38:33] wait until we start to see weather catastrophes

[00:38:35] destroying productive capabilities in some countries,

[00:38:38] and then those countries refusing to export anymore.

[00:38:41] The classic example at the moment is that China,

[00:38:45] is India no longer exports rice,

[00:38:47] except for basmati rice,

[00:38:48] in the response to a couple of climate catastrophes

[00:38:52] with wheat crops in India,

[00:38:54] with rice crops in India.

[00:38:56] So, at some point,

[00:38:57] countries are going to say,

[00:38:58] that's it,

[00:38:59] we're not exporting anymore.

[00:39:00] And then there goes your supply chain,

[00:39:02] unless you produced it domestically.

[00:39:04] Right.

[00:39:04] And I wonder,

[00:39:05] so just on the final point then,

[00:39:06] I wonder whether actually Donald Trump

[00:39:08] is helping us all do that.

[00:39:09] So, by imposing tariffs,

[00:39:11] and then,

[00:39:12] you know,

[00:39:14] tariffs in retaliation,

[00:39:15] will Europe have to become more self-sufficient

[00:39:18] as a result?

[00:39:19] I think that's feasible.

[00:39:21] So, you know,

[00:39:22] as much as it's been done for crazy reasons,

[00:39:25] the actual logic behind the current structure

[00:39:27] is even crazier.

[00:39:28] So, a bit of, you know,

[00:39:29] Trump crazy in the opposite direction

[00:39:31] may be beneficial.

[00:39:32] Yeah.

[00:39:32] Well, hell,

[00:39:33] Europe needs it,

[00:39:34] doesn't it?

[00:39:35] You know,

[00:39:35] it needs a burst of enthusiasm

[00:39:38] and a bit of investment.

[00:39:39] But actually,

[00:39:40] you know,

[00:39:40] if you were looking as to where you put your money,

[00:39:42] if you're an investor,

[00:39:43] and you're thinking,

[00:39:44] well, okay,

[00:39:44] because all money is flowing to the States

[00:39:46] at the moment,

[00:39:46] it's amazing how all of a sudden

[00:39:50] investors,

[00:39:50] because the investment community

[00:39:51] love Trump,

[00:39:52] of course,

[00:39:52] so they're putting money into the US

[00:39:55] because they see this opportunity for growth.

[00:39:58] But actually,

[00:39:58] maybe the smart money

[00:39:59] should equally be going to Europe

[00:40:00] because they will have to invest to retaliate.

[00:40:03] They've got an even bigger constraint,

[00:40:05] and that's the Maastricht Treaty

[00:40:06] and the limitation on government spending.

[00:40:08] So, I think what we're going to say is...

[00:40:10] But Trump's giving himself

[00:40:11] the same disadvantage,

[00:40:12] of course.

[00:40:12] He is.

[00:40:13] He is.

[00:40:13] He has a focus on eliminating

[00:40:15] the capacity of the government

[00:40:16] to create money

[00:40:17] without knowing that's what he's doing,

[00:40:19] without understanding

[00:40:20] that interest payments

[00:40:20] aren't a cost of the government

[00:40:23] for borrowing.

[00:40:24] It's meaning they're creating

[00:40:25] too much money

[00:40:25] for the financial sector.

[00:40:27] So, all this stuff

[00:40:28] is completely missed

[00:40:30] by Musk in particular,

[00:40:33] but also by Trump.

[00:40:35] At least Musk,

[00:40:35] I think,

[00:40:36] has got the intellect

[00:40:36] to understand it,

[00:40:37] but he doesn't.

[00:40:38] He hasn't got it right at the moment.

[00:40:39] So, yeah,

[00:40:40] there's all sorts of

[00:40:41] conflicting elements

[00:40:42] of the current policies

[00:40:44] of the Trump administration.

[00:40:46] And it's going to be

[00:40:47] a lot of fun

[00:40:47] watching them

[00:40:48] roll out over time.

[00:40:50] Well, he hasn't got much time,

[00:40:51] that's the thing.

[00:40:51] But, yeah,

[00:40:51] let's get the popcorn out.

[00:40:52] He's only got four years

[00:40:53] and midterms,

[00:40:54] halfway through that.

[00:40:57] But I guess we've got

[00:40:57] J.D. Vance next

[00:40:58] as the next president,

[00:41:00] unless it is,

[00:41:01] of course,

[00:41:02] you know,

[00:41:03] Elon Musk himself.

[00:41:04] No possibility there

[00:41:05] because he's not

[00:41:05] an American born.

[00:41:06] So, at least that's one

[00:41:08] terror you can leave

[00:41:09] out of your worries, mate.

[00:41:11] Out of the scenarios.

[00:41:12] Well, it can always change that law.

[00:41:14] All right.

[00:41:15] I mean,

[00:41:16] constitutional change.

[00:41:17] That's the next thing,

[00:41:18] isn't it?

[00:41:19] Anyway,

[00:41:20] we'll leave it there.

[00:41:20] As you say,

[00:41:21] we'll get the popcorn out

[00:41:22] and we'll watch with interest.

[00:41:23] But, yeah,

[00:41:24] it seems like

[00:41:24] even if the idea is right,

[00:41:27] there are so many

[00:41:29] impracticalities

[00:41:29] about the education

[00:41:31] that's needed

[00:41:32] to enable

[00:41:33] this structural change.

[00:41:35] and then

[00:41:35] the reaction

[00:41:37] from the rest

[00:41:37] of the world

[00:41:38] and the

[00:41:40] possibility

[00:41:40] that the US dollar

[00:41:41] will just grow

[00:41:42] too strong

[00:41:42] as a result of this

[00:41:43] and that's going to be

[00:41:44] an impediment

[00:41:46] to their growth

[00:41:47] as well.

[00:41:47] lots of people

[00:41:48] are going to be

[00:41:48] having interesting

[00:41:49] spreads on currency

[00:41:50] markets

[00:41:51] coming out of this.

[00:41:52] They will indeed.

[00:41:56] Well,

[00:41:57] we'll catch you

[00:41:57] next time, Steve.

[00:41:58] Okay, mate, bye.

[00:41:59] The Debunking Economics Podcast.

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