Oren Cass & Noah Smith Debate the True Impact of Tariffs

1. 0:00 – 0:50

   Introduction & Framing the Free Trade Debate

   1. OCOren Cass0:00

      The question is, does free trade with China advance free markets, or does it distort and wreck our free market? We have treated free trade as the natural extension of free market. If you are-- attempt to be for free trade with a non-market economy, you are not actually advancing free markets in any significant way at all. You're actually dramatically hindering them.

   2. NSNoah Smith0:24

      People focus obsessively on the trade deficits and surpluses, on the imbalances, on the net amount. But basically, the more important effect is the gross, the total, the total amount of exporting that we're able to do, you know? And so in that sense, trade between us and Europe is positive sum without trade, you know, being balanced. Trade is positive sum.

2. 0:50 – 3:50

   American Compass & Economic Philosophy

   1. ETErik Torenberg0:51

      Oren, we're really excited to, to, to have you on because we've been talking about some, some topics over the past few months that you've been thinking a lot about, that you've been writing a lot about, that your thinking has in fact, um, in-informed, you know, and, and, and inspired and encouraged w- some of, some of what, what's actually happened. And so before we get into some of the, the, the specifics, I, I wanted for, for some of our audience who may not be familiar, especially on the a16z side, I wanted to just give you, uh, an opportunity to kind of introduce your, your, your platform, uh, s-so to speak, or introduce kind of the main topics and, and ideas that you're, that you're affiliated with. You know, we'll link to, to, to, to, to the book and, and some of the articles about kind of a, a newer conser-conservatism, but maybe you can, uh, he-help define it in, in broad strokes, then we'll get to some of the specifics.

   2. OCOren Cass1:39

      Sure. Yeah. I'll, I'll try to keep it short. Let, let me know if you want me to say more about anything. Uh, but I founded American Compass back in twenty twenty, uh, with the mission to restore an economic consensus that emphasizes the importance of family, community, and industry to the nation's liberty and prosperity. And I suppose from one perspective you'd say like, "Well, that seems self-evident and unnecessary." Uh, but from another, I'd say it, it represents a, a fairly dramatic departure from the way e-economics has been conducted, economic policy has been conducted, uh, especially on the right of center, but, but probably including the center left as well, and, and therefore really given shape to our economic trajectory over the past generation. Uh, so our view is that I think we have seen a sort of excessive faith in markets and excessive assumption that whatever pursues, you know, whatever produces efficiency, whatever, uh, maximizes corporate profits, that that too will be best for everybody, uh, and that that fa- has, has failed in two respects. First of all, that that is in fact not best for everybody. You can get very unequal and distorted outcomes. Uh, but secondly, that even if, if you had the economic system operating the, the way it, you, you might ideally wish it would, that's not actually gonna take care a lot of the, of the things that matter most to people. And, and that pairing of family, community, and industry maybe s-seems a little bit odd. Those aren't three things that always get paired together. But we see them as three things that are in-incredibly important to flourishing, both sort of human flourishing at the micro level, national flourishing at the macro level, uh, that, that markets simply don't guarantee. Markets, markets can uphold those things, but there's nothing in economics that says that markets will. And so the core of our argument is that if those are things that, that anybody, and, and especially conservatives care about, then they have to be willing to, to think about an approach to economics and markets that goes beyond just trusting that, that whatever comes out of the market is, is going to be good. And, and that then leads toward all sorts of interesting policy conversations I think have, have been absent in, uh, for, for about a generation now.

3. 3:50 – 5:04

   The Limits of Free Markets and Policy Implications

   1. NSNoah Smith3:50

      I would like to know how, uh, restoring manufacturing, you know, 'cause I've been calling for restoring manufacturing for a long time for various, you know, economic purposes, higher growth, uh, national security, things like that. But I wanna know how restoring manufacturing would strengthen family and community in America. And that's not-- that's a nexus that I really haven't, I haven't seen much evidence on. And, you know, I know, uh, ob-observing countries like Germany and South Korea, where the manufacturing share of industry has remained remarkably high. So I see them with extremely low fertility rates, low rates of family formation, you know, skyrocketing divorce rates, and, uh, you know, um, in Korea's case, an extreme suicide problem. And so I'm thinking how is re-- if, if we could restore manufacturing, which I would like to do, how will that restore the family?

   2. OCOren Cass4:44

      I guess those are, those are questions at, at very different levels of [chuckles] specificity. Um, let me say a, a little bit more about the kind of the, the broader question first, and, and then if we wanna to dive into the manufacturing piece, certainly we can. Um, you know, I, I think the-- to, to your point, Erik, about, you know, and this is Econ 102 that I, I find myself

4. 5:04 – 9:08

   Rethinking Comparative Advantage & Modern Trade

   1. OCOren Cass5:04

      on. Uh, it seems to me that, that a lot of the gap is between the sort of, I think, quite oversimplified models that we teach in, in an Econ 101 or an Econ 102, and the set of factors that are, are actually relevant in a, a modern economy. So, you know, to give one example, if, if you are learning comparative advantage in Econ 101 and, and the wonders of free trade, uh, you are almost certainly talking about an economy with two markets and two goods. Uh, they're almost invariably agricultural goods, uh, or, or something relying on natural resources. And you're going to see that if you change how much of each each country produces, and you trade some of one for some of the other, then both can be better off. Uh, and, and that's great. Totally agree. No, no issue with that. Uh, the problem in the real economy is, is twofold. One is that, of course, most of what's being traded is, is not natural resources where, you know, maybe you're a place that grows a lot of avocados or, or maybe you're a place that has a lot of fish, uh, but it's manufactured goods. And advantages in manufactured goods are a lot less likely to emerge from some sort of natural endowment of a country and much more likely to emerge from the explicitPolicy choices that the country makes. I mean, a good example is, you know, there is nothing about Taiwan's be-- there, there's no special silicon on Taiwan's beaches that make it the best place to, to fabricate advanced semiconductors. And so if, uh, if, if you are expecting to just see everybody kind of have a natural advantage in something, and, and that's what we trade, you'll be very disappointed. You'll find that the countries that strategically attempt to develop an advantage in something, uh, get to excel in that, and some things are more economically valuable, have more spillovers, have more security implications than others. Uh, the second problem, of course, is that you don't actually have to trade goods for goods at all. You can have the situation we have in the American economy today represented by a, a, you know, trillion-plus dollar trade deficit in which you are exchanging goods for assets. And so if you imagine going back to your happy little, uh... I guess in, in my Econ 101 class, it was, it was fish and sweaters. And you imagine that, well, what if one country makes the fish or catches the fish and makes the sweaters, and the other country just issues treasury debt to buy fish and sweaters? Um, it's not nearly as obvious to me that that is actually a, a, a welfare-enhancing [chuckles] exchange, uh, certainly over the long run. And so, you know, that's, that's one concrete example in, in the, in the trade space where I think there's, there's a big problem. The one other thing I'd add that's even more conceptual that I think we've really failed to grapple with until recently is, you know, to your point about being free market enthusiasts, I, I too am a free market enthusiast, and the question is: Does free trade with China advance free markets, or does it distort and wreck our free market? And, and we have treated free trade as the natural extension of free markets. If you are for free markets, you are for free trade. But I think what we've learned is if you are... attempt to be for free trade with a non-market economy, you are not actually advancing free markets in any significant way at all. You're actually dramatically hindering them. So, um, that's, uh, that's one example of an area. You know, we do a lot of work also on industrial policy, on financial markets and investment flows, on labor policy, uh, on competition policy. But all of it, uh, ultimately follows the same template of asking, uh, you know, if we look at, at the world as it actually is, if we look at what economics actually can and, and cannot promise, uh, where are the places where policy is probably going to have to play a role if, if we want to get the kinds of outcomes we, we would actually say are good outcomes?

   2. ETErik Torenberg8:56

      W- j-just to follow up on, on that, on that point. Y-your, your proposed policies of, you know, reduced immigration, trade protectionism via tariffs, policy to increase domestic in-industry manufacturing, policies to increase fertility.

5. 9:08 – 10:25

   Tariffs: American Tradition vs. Chinese Strategy

   1. ETErik Torenberg9:08

      Is your policy playbook actually similar to China's or kind of turning us i-i-i-into China or kind of m-mimicking or mirroring th-their strategy or?

   2. OCOren Cass9:17

      Uh, I don't think so. I mean, I guess I would say just because China is doing something doesn't make it bad.

   3. ETErik Torenberg9:24

      Fair enough.

   4. OCOren Cass9:24

      Um, but of course, a, a lot of... well, virtually everything you just described were also policies that were the American tradition until very recently. America had very high tariffs and built its domestic industry, uh, behind a wall of protectionism. America aggressively restricted immigration. America, uh, had quite aggressive industrial policy and, and so on and so forth. Um, and, and of course, conversely, China, I, I believe maybe just last week, they an-announced they might be doing some sort of, uh, pro-fertility policy. But historically, China has been the poster child for extremely unwise anti-fertility policy. So, uh, I, I wouldn't characterize a-anything of what we're doing as saying we should become more like China. I would say to the extent that we are going to operate in a global economy, we need to have policy that accounts for the existence of China and, and that is unfortunately something that we have declined to do.

   5. NSNoah Smith10:22

      Oren, I have a question. Do you think that,

6. 10:25 – 12:15

   Evaluating the Impact of Trump’s Tariffs

   1. NSNoah Smith10:25

      uh, Trump's tariffs overall will increase US, uh, manufacturing output and employment?

   2. OCOren Cass10:34

      Uh, in the long run, I think it definitely will because I think it creates a-

   3. NSNoah Smith10:36

      How long is long?

   4. OCOren Cass10:37

      Hmm?

   5. NSNoah Smith10:38

      How long?

   6. OCOren Cass10:40

      Well, let me kinda answer the question. I think if-

   7. NSNoah Smith10:43

      Yeah

   8. OCOren Cass10:43

      ... if the long run is, uh, you know, anywhere upwards of a few years, I think it will. I think the question is: How long does it take to actually change investment decisions, and then how long does it take investments to come online? But I would expect to see, uh, the results of some of the investments we're already seeing being made come online in the next few years. I think a, you know, a good proxy is how long did it take Japanese automakers to set up in the US after their imports into the US were, uh, badly constrained. Uh, and then I think from there, a lot of it comes down to what we do on policy, both can we actually create a credible, long-term, consistent commitment to a tariff policy that, that makes people believe they should invest, uh, and can we do the other complementary things? The, you know, I think on, on kind of maybe I would call it the supply side, the industrial policy to actually support investment, uh, the workforce development. I think there are other things that, that we need as well.

   9. NSNoah Smith11:47

      So to be clear, you know, since Trump, uh, announced his, quote-unquote, "Liberation Day tariffs," we've seen deterioration in manufacturing PMIs, uh, purchasing orders, um, you know, investment plans. Every indication of manufacturing we've had is slumping now and, and notably beginning directly after Trump's announcement of those big tariffs. Uh, and, and we have aPretty good idea. You know, when we, when we do surveys of people who run manufacturing

7. 12:15 – 15:41

   Short-Term Pain vs. Long-Term Gain in Manufacturing

   1. NSNoah Smith12:15

      companies, what they say is exactly sort of what, you know, basic economic theory would say, which is they're having a very difficult time sourcing intermediate input. So there's all kinds of things that we get from supply chains they can't source, and so as a result, they're cutting back on building factories. Uh, you know, they're cutting back on investing and ordering more manufactured... People aren't ordering as many manufactured goods, et cetera, et cetera. And so if I'm hearing you correctly, the idea is that this is temporary and that once we reestablish entirely within country supply chains, this will reverse and manufacturers will start investing a bunch, and we'll have a manufacturing boom, and that the manufacturing, uh, bust that we're seeing now, uh, apparently as a result of the tariffs, is simply temporary pain for long-term gain. We just have to stay the course. Is that an accurate summary of what you're telling me?

   2. OCOren Cass13:06

      Well, I guess I'd prefer to sort of answer questions that you ask instead of try to sort of give a yes, no to, to, to your statement of a case. The, the, the situation-

   3. NSNoah Smith13:17

      Well then let's say, let's-- I, I would like you to evaluate this, this, uh, you know, tell me what you think about the fact that all the manufacturing indicators in the economy are flashing red directly after the announcement of Trump's tariffs.

   4. OCOren Cass13:29

      Well, so first of all, I would dispute your characterization that they're all flashing red. Um, I think in general, the distance between the sort of overheated rhetoric we have gotten from economists and the actual performance of the economy has been pretty dramatic on, on almost every front. Um, there have certainly been a number of manufacturers who have said this has made life harder. Uh, there have been others who have said, "Actually, this is inducing us to make substantial additional investments." Uh, you know, we've already seen TSMC as one example, in fact, say that they are slowing investment in Japan to invest more quickly in the US. We've seen, uh... There was a very good story on, on drug makers in The Wall Street Journal, I think it was probably last week, saying that, yes, they actually thought the effect of, of the pharmaceutical tariffs under consideration would lead to significant reshoring of, of drug, drug manufacturing. So, uh, I, I guess if I look at both the economy's actual performance over the last six months, uh, and I look at the sort of more anecdotal evidence, I would say I think it's, it's absolutely too soon to tell one way or the other. Um, but I would say that what gives me a significant amount of, of optimism is that, uh, in fact, I do think you're seeing companies, generally speaking, respond to the incentives in front of them by thinking about how they would adjust their businesses accordingly. And so I think, you know, the intermediate goods piece of it is definitely an important one that creates short-term challenges. But at the end of the day, if the goal is not to, you know, make America the assembly hub of the world, but to actually re-industrialize, you have to actually create incentives to, to bring back those intermediate supplies. You can't just say, "We want cheap intermediate supplies so that we can, I, I guess, assemble for re-export." Um, and so I guess I, I don't know. I'd be very interested to know kind of what the... I, I guess you've said all the manufacturing, uh, signs are flashing red. I, I, I haven't-- That, that has not been my perception of the economic coverage over the last month or two.

8. 15:41 – 24:21

   Data, Indicators, and the State of US Manufacturing

   1. NSNoah Smith15:41

      Oren, what data sources are you looking at, uh, when you're evaluating the state of America's manufacturing in the last few months?

   2. OCOren Cass15:47

      Well, I mean, there's manufacturing employment. There's, uh, uh, I guess one number I'm very interested to look at that we won't have for a little bit longer is Q2 capital investment, which I believe we'll get longer in Aug- later in August. There is, uh, various, you know, manufacturing sentiment indications. There is actual kind of industrial output capacity utilization, these kinds of measures. I mean, we do an awful lot to measure, uh, the performance of the manufacturing sector. Uh, and I think certainly we saw in the immediate aftermath of the tariff announcement, a lot of downturns and a lot of concern. Uh, but I'm, I'm not sure how much of that has actually been sort of borne out at this point several months later.

   3. NSNoah Smith16:36

      Uh, are, do you, you know, um, what PMIs are, right?

   4. OCOren Cass16:41

      Uh, yeah, but so what are... Yeah.

   5. NSNoah Smith16:44

      So-

   6. OCOren Cass16:44

      Well, I mean, I don't. It's appropriate to educate me.

   7. NSNoah Smith16:46

      The Institute for Supply Management, which is a, you know, a consortium kind of thing. They, they survey manufacturing peop- you know, companies. They call them up and they ask them, "Are you investing? How much are you investing? Do you have more orders?" Blah, blah, blah. They do these surveys and, um, uh, you know, it's, it's pretty rigorous data. And so if you, if you talk to them, you know, here, let me read from a, a Bloomberg article from, uh, the first of this month that said, "US factory con- activity contracted in June for a fourth consecutive month as orders and employment shrank at a faster pace, extending the malaise in manufacturing. Um, bookings contracted by the most in three months and have been shrinking for the past five months. An index order backlogs," blah, blah, blah. Um, employment index, which measures manufacturing employment, has fallen significantly. Um, then the Purchasing Managers Index, the PMI, um, is also, uh, you know, below fifty, which signals contraction in the industry. And this is, you know, Bloomberg reports on this, The Wall Street Journal reports on it. E-everyone reports on this as a reliable first indicator of how manufacturing is doing. It's not perfect, you know, it's, um... But over the long term, it's, it's pretty correlated with, you know, government statistics on how manufacturing is doing. And so I'm wondering, where's the alternative statistics? Where are the numbers I'm not seeing that show good news in the manufacturing sector since Trump's tariffs? Where is it?

   8. OCOren Cass18:16

      Well, a-again, I, I just gave you a, a long list of other economic indicators we have that all seem to be holding up quite well. I, I don't think that there's-

   9. NSNoah Smith18:25

      They're not, though. They're not. Wait, no, they're not. I mean, like manufacturing, you know, uh, like manufacturing employment is not doing well. We-we're not seeing like a, a rise in manufacturing employment. We're not seeing a rise in manufacturing industrial production. We're not-

   10. OCOren Cass18:40

       Right. But-

   11. NSNoah Smith18:40

       We're not seeing this.

   12. OCOren Cass18:41

       Noah, that-- those are just exactly the things I said I didn't think you would expect to see over the initial months of a policy like this because you need to see... I mean, it literally takes several years to do capital investment and actually build things out. I think, you know, one thing that really kind of frustrates me in a lot of these discussions is that I think back to the argument from the other side, right? When the argument was, you know, "Okay, we're going to aggressively expand free trade. We're going to embrace China." Um, and, oh, we got a lot of initial negative results from that, but that's okay. Anybody who focus on those doesn't sort of understand the long run and the way that everybody's going to actually end up better off someday. But then when we go in the other direction and say, "Hey, actually, you know, reshoring is going to be a process. You have to shift incentives. There's going to be disruption. Here's the, the better thing we might build toward," you just kind of get stuck on a podcast with somebody reading you the, the results of last month's, uh, phone survey data. So I, I do think we have to evaluate, uh, a, a little bit more kind of, well, what were the things that we did or did not expect to happen over the initial months versus what are the things we did or did not expect to happen over several years? And to say that most of the economists' predictions of everything that was going to go wrong initially have, have, have essentially been wrong. I mean, that, that's not-

   13. NSNoah Smith20:07

       What about the data I just read you? What about that? I mean, that was an economist, economist predicted, you know, tariffs would interfere with supply chains, trade and intermediate goods, and this would lead to a contraction in manufacturing. That's exactly what we're seeing now.

   14. OCOren Cass20:20

       Yeah. No-

   15. NSNoah Smith20:20

       Um, I don't understand how that prediction has gone wrong. That seems-

   16. OCOren Cass20:25

       Yeah. I guess I meant more broadly-

   17. NSNoah Smith20:26

       It went wrong. It went wrong

   18. OCOren Cass20:26

       ... everything from, you know, the, the direction of the dollar to the performance of the stock market to the level of retaliation we should expect. Um, there was a sort of consensus model of here's what's going to happen if you impose tariffs and why it's extreme, it's all folly, and that world has not played out. So I, I do think it's important for those who were sure they knew exactly what tariffs were going to do because they took, um, Econ 101 to kind of actually step back and recognize that it does seem the world's a little bit more complicated than that.

   19. NSNoah Smith21:04

       I agree that the world is complicated, and I agree that there's a lot of uncertainty over the impact that tariffs will have. I can also tell you the, um, the predictions that I know that economists got most wrong are about the direction of the dollar. That, that is one prediction that went the opposite way. However, um, I do think that if we're talking about, uh, you know, important effects of tariffs, the effect on manufacturing has got to be an important one, you know. Because the whole idea of tariffs, of Trump's tariffs, you know, maybe not Biden's tariffs, but the whole idea of Trump's tariffs is that this is gonna lead to a renaissance in manufacturing. And I understand that, yes, in five years you could see something different, and if that's the argument, if that's what we're placing our hopes on, then let's be explicit about that. Let's say we expect to see short-term pain for long-term gain. But I will say that economists predicted-

   20. OCOren Cass21:54

       I've been extremely explicit about that

   21. NSNoah Smith21:55

       ... pain in the manufacturing sector, and that's exactly what all the data are showing us now.

   22. OCOren Cass22:00

       Yeah. I, I've been e-extremely explicit throughout in, in discussing tariffs that, that there is short-term pain associated in, in, in various axes. I think, frankly, I'm surprised that, that we haven't seen more pass through to consumer prices than we've seen. I would, I would certainly expect to see an impact there as well, and that the, the long-term gain here... I mean, a, a few minutes ago, you, we said, I said I would expect to see this over the long term. You said, "How long?" I, I think I said three to five years. I, I-- that's, I think, a, a reasonable range in which to expect to actually see a, a manufacturing sector that is performing differently. I think the good news is that there are other dimensions on which we should see things sooner. Capital investment, construction, and so forth are going to be a leading indicator of that. But I'm, I'm not sure who out there was saying, like, if you impose tariffs, then, like, manufacturing employment will magically materialize in factories that haven't been built yet. I, I... Maybe someone was saying that, but it seems a little bit unfair to take that as the pro-tariff argument when it's obviously not the actual basis on, on which the argument is made.

   23. NSNoah Smith23:14

       But I'm saying that economists were right about this, uh, the problems in the manufacturing sector that we're now seeing. Like, it was a correct prediction by economists.

   24. OCOren Cass23:22

       That, that sentiment would turn down in the initial months.

   25. NSNoah Smith23:25

       That... I'm not sure that anyone gave a month timeline for it, but the fact that, uh, the idea that this would be generally bad for manufacturing would cause a contraction in the sector, uh, that's what we're seeing. Um, and we know the mechanism by which this happens, which is, uh, disruption of, of intermediate goods trade. And, um-

   26. OCOren Cass23:45

       Well, there is obviously-

   27. NSNoah Smith23:46

       So it seems like the economists were right.

   28. OCOren Cass23:48

       Yeah. Go ahead, Erik.

   29. NSNoah Smith23:48

       The economists were right.

   30. ETErik Torenberg23:48

       I, I think Oren is, is, is, is saying that, or acknowledging that there, there would be some short-term pain for long-term gain, Noah-
9. 24:21 – 45:24

   The Role of Industrial Policy and Workforce Development

   1. ETErik Torenberg24:21

      question for, for both of you, which is what would cause you to change your mind about the long run? Uh, you know, um, what would need to happen or occur such that you have a different view of sort of what is the, the long-term effects of, of, of these tariffs?

   2. OCOren Cass24:35

      Well, I think for me, as I, I was saying, I-- the sort of intermediate question that, that I'm most interested in is what happens to capital investment. At, at the end of the day, the, the sort of, uh, sequence of, of events that you're, you are trying to influence with tariffs is to induce relatively more capital investment domestically to expand domestic production capacity. Um, I, I think if we see that, and, you know, frankly, in a lot of ways that that was already at elevated levels because of, you know, other things that Noah and I agree on, like the CHIPS Act that, you know, I've often highlighted was dollar for dollar an, an extremely effective way to start boosting, um, investment. If, if we start to see those kinds of investments now in, in other sectors of the economy, also, if we see that at a sustained elevated level over an extended period of time, that would be the kind of over the next year to three years sign that, that this is actually doing what we want it to do. And then the, the benefit that we would get if it, if it actually works out, is that we would see then in the longer run a su- significant expansion of manufacturing capacity. We would see that in output, we would see that in manufacturing as a share of GDP. Uh, we would see that in employment. And then in a lot of ways, what I'm, what I'm most concerned about, if it's working, we need to see it in the productivity data, because manufacturing productivity has actually been falling over the past decade, which is, which is a huge problem. And so if we are actually seeing investment in a, in a renewed and revitalized manufacturing sector, um, that absolutely is going to be, and we better expect will be, you know, much more automated than the kind of manufacturing we've had in the past, that should, that should show up in the productivity data as well.

   3. NSNoah Smith26:25

      So I have a, uh, another question here, which is that you've often talked about the, um, what you see as the shortcomings of economics, you know, as a discipline, uh, for predicting the effects of tariffs, you know, and economic policy in general. Um, when you're predicting the effects of tariffs, what do you rely on? How do you make those predictions? Do you have some theories? Do you have some, you know, other countries' examples are going on, historical examples, some other discipline like sociology or perhaps, uh, just some stuff you thought of on your own? Like where are your predictions coming from?

   4. OCOren Cass27:08

      Well, I guess I'm happy to answer that in detail. I wanna... I, I'd figured, Noah, that, that you were gonna touch on the prior question also, but I'll, I'll just add-

   5. NSNoah Smith27:16

      What's the prior question? I'm sorry.

   6. ETErik Torenberg27:17

      Oh, it was basically, um, Noah, what would-- And then we-let's circle back to Noah's question after this. But yeah, Noah, let's, let's hear your take on what would cause you to be excited about the long run for tariff. Like, what would need to change or you need to see for you to be like, "Oh, actually, you know, it's actually having a long run positive effect"?

   7. NSNoah Smith27:33

      Boom in manufacturing investment, for sure. If we see that, if we see the US manufacturing sector actually get revitalized in a major way, uh, that'll be, that'll be exciting. Um, so far we're seeing the opposite. Uh, and if that turns around at some point, that'll be great. Um-

   8. ETErik Torenberg27:49

      Imagine a world in which it does turn around. Like what, what needs to happen for, for that to happen?

   9. NSNoah Smith27:53

      Oh, you mean what, what do I think would actually cause that to happen?

   10. ETErik Torenberg27:56

       Yeah.

   11. NSNoah Smith27:56

       I think, um, one thing would be industrial policy. Uh, I also think that in terms of tariffs, we should have, um, essentially entirely free trade with, with allies. I think that that would be a wise thing to do because, you know, Japanese manufacturing and European manufacturing don't actually threaten America. In fact, we gain much more from pooling our markets so that we can attain scale similar to what China enjoys. Uh, because China's pretty much the only competitive threat we face, and which all our allies are facing at the same time, and we're fighting with our allies instead of pooling our resources to, to stand up to China. But that's my... You know, that, that's, that's a bit of a sidetrack, uh, for me right there. I, I, you know, I, I wrote about all these things pretty extensively during the Biden years, and I thought, "This is what we ought to be doing." But I think industrial policy is a big missing piece. Um, and also c- there are various capacity building policies like infrastructure, you know, education. Uh, you know, we need trained manufacturing workforce. Uh, one really reliable thing we see is when we have like voc- really good vocational schools, you get better factories. Just train people to work in factories. Uh, Tim Bartik has done a lot of work on that. Um, and then, uh, yeah, pretty much I, I think that it's pretty clear what to do to effect a manufacturing revival. Uh, right now-- So, so one of the big indicators that I look at is factory construction. And factory construction has to be adjusted for the price of building new factories 'cause we don't wanna just, you know, make a chart of inflation, right? But, uh, when you look at factory construction, real, real factory construction, you saw this enormous... You, you saw it basically flat, at a flat level for decades and decades at a fairly low level. Then you saw this enormous boom during the Biden years, and all the factories concentrated in the areas where Biden's industrial policy was, you know, sort of incentivizing factories, uh, chips, batteries, and other things like that. Just this enormous boom. And that now, since Trump got into office, you've seen that boom go into reverse. You see-- You're seeing the pace of new factory construction falling since, uh, quote-unquote, "Liberation Day." And that's a bad sign to me, but I, I accept that in five years we may see something else. Um-

   12. OCOren Cass30:08

       I'm just, sorry, genuinely curious which... Because that was when I mentioned I, I'm very interested to see in August what the Q2, um, factory construction data looks like, which-- what data's out there already on that?

   13. NSNoah Smith30:21

       It's called total construction spending on manufacturing in the United States. And you can look at that on Fred, you can look at that anywhere, and it shows the, you know, just in dollars.

   14. OCOren Cass30:31

       Mm-hmm.

   15. NSNoah Smith30:31

       Right? Um, you can also look at it as a percent of GDP if you want, but I prefer to look at it in dollars. And then you have the producer price index for new industrial building construction is the appro-- is the price of factory construction. PPI for new industrial building construction. And you can see that under Biden, this, you know, just increased a huge amount, and then under Trump it has decreased a bit so far. And, uh, we'll see if it keeps decreasing, but it's a... To me, that's a bad sign so far.

   16. OCOren Cass31:02

       Okay. Um, yeah. I mean, I think the, uh... I would just echo some of what, uh, you know, what, what Noah had just said about some of these other factors that, that I think are really important as well. Because, uh, you know, I think both in terms of what it takes on tariff policy if, if you really want these tariffs to work, uh, stability and certainty is, is, is incredibly important. And, and this is a criticism I've had of the Trump tariffs since the beginning, that if what matters is not what people think the tariffs are going to be this week versus next week, what matters is if, uh, people actually believe these are what the tariffs are going to be three years from now when, when the investments would start to pay off or not. And so that's where I think both sort of stability and the tariffs ideally needing to actually legislate some of this instead of having it both subject to legal challenges and, and a lot of changes in, in executive orders are, are both really important. Uh, and then as Noah said, I, I think the industrial policy side, I, I think the workforce side is, uh, is, is incredibly important as well. So, you know, if, if as we've been talking about, if, if you ask me do I think tariffs are a-an important positive step toward reshoring manufacturing, I would say yes, absolutely. If the question is, you know, how far are we toward the, the policy package that's, that's going to get us maximum bang for our buck, I would say there's, there's certainly a lot of work still to do. Um, and, you know, and th- and that maybe connects then to, to Noah's other s- que- Noah's other question about sort of, well, how, how do you evaluate these things? And, you know, in my mind, I think the way... the, the, the right way to evaluate them is I, I think a lot of the, the frameworks that economics provides us in terms of thinking about incentives, particularly thinking at the margin and so forth, are exactly the right way to, to, to assess economic policy. I think where economics as a, as a discipline has really gone off the rails is in, in over-reliance on a set of assumptions that don't necessarily hold, and, and on... and then over-reliance on a set of models that sort of requires those assumptions. And so, you know, this is where I think we've seen, uh, frankly, a, a lot of very bad forecasts come out of, for instance, the prediction that, you know, free trade with China will benefit American workers and we'll be making and selling more to them than ever before, and so on and so forth, um, when that sort of assumed a certain policy environment in China that did not exist. And so I think, you know, in a sense, the right perspective is to look at things from the perspective of a business owner, look at it from the perspective of capital and ask what are the best opportunities to earn a lot of money. I mean, this goes all the way back to Adam Smith and The Wealth of Nations and the invisible hand, where his argument about the invisible hand is not that this kind of somehow automatically works by magic. His argument is that if you actually have incentives aligned, and in fact, the, the first one he lists is if you have people preferring to invest domestically over investing overseas, um, then their pursuit of private profit will also advance the public interest. And, and so me- for me, the question is what are the incentives for people pursuing private profit? And, and if we have policies that, uh, make it the incentive to offshore to, uh, you know, try to bring in cheaper labor, to try to use financial markets to kind of extract additional, um, capital out of firms, then, then those are the things that people will do. And so at the margin, I, I think we have to ask, are the policies that we're pursuing ones that are pushing incentives in better directions or, or putting them in... pushing them in worse directions?

   17. NSNoah Smith34:57

       So le-let's go back to this idea of, of where, where you get these ideas. You know, like the idea that tariffs will do this and that to help manufacturing. Where does this, where does this idea come from? Where, where did you get this? Did you just sit there and think common sense-wise it makes... it sort of sounds legit? Or, or, you know, are you using an analogy to say America's early growth in the, you know, 1800s when we had high tariffs, um, and just sort of saying, "Well, we grew fast then and we had high tariffs then, so high tariffs will, will increase growth now"? Or where, where do you get this idea that tariffs will help, uh, manufacturing and the incomes and prosperity of the average American?

   18. OCOren Cass35:47

       Well, I, I guess there are a few ways to answer that question. I mean, I think one, as you noted, there have certainly been times in the past when we have used a much more, uh, robust tariff agenda. And conversely, our decision to, uh, drop tariffs and, and forego them has conversely produced a lot of the things that I think we've been a lot less happy with. Um, you know, I think if you look at, at somebody like Paul Samuelson's work, I, I often point out that in his seminal textbook, Economics, he kind of goes through the arguments for and against tariffs andBasically at the end of the day acknowledges that any country could pursue a beggar thy neighbor, their, thy neighbor strategy. Uh, and it, you know... I mean, I've, I'm sure there's a whole field of kind of optimal tariff theory, but that the, the core case for the United States to embrace free trade, uh, and Fred Bergsten makes the same point in, in the '70s, isn't actually an economic case, it's, it's a foreign policy case. And so, you know, I, I think you can also look at the policies of a lot of other countries around the world today that have, uh, obviously had a, a lot of success promoting, um, manufacturing and industry. Uh, and, and they certainly tend to do it in a more protectionist way. Um, and so I, I mean, I guess it, it seems to me there are a, a lot of signals all pointing in the same direction. I, I might ask you kind of the converse, what would be the reason to believe that, you know, free trade with, with certainly with a country like China was going to be good for our manufacturing sector?

   19. NSNoah Smith37:35

       Well, I, I don't necessarily know people who did predict that because I was a kid, and when I look back at economics papers on the topic, I don't see much. Like there-- I don't see many, you know, economic papers saying free trade with China will be good for the manufacturing sector specifically.

   20. OCOren Cass37:54

       But so then is-

   21. NSNoah Smith37:55

       I see-

   22. OCOren Cass37:55

       But then is the implication that-

   23. NSNoah Smith37:57

       Oren, hold on

   24. OCOren Cass37:57

       ... tariffs on China would be better for the manufacturing sector?

   25. NSNoah Smith38:00

       What I'm saying is that I don't know... So when you're asking me to justify the supposed predictions of people, I don't know who made those predictions, and so I... And I don't know economic models that do predict that. For example, if you take the, you know, dumbest, simplest Econ 101 model of trade, uh, you know, in existence, which is, um, you know, the comparative advantage model of David Ricardo, that would predict that, um, trade with China would be bad for our manufacturing sector because the ideas of China special-- uh, you know, has comparative advantage in manufacturing, we have comparative advantage in services, you know, or maybe agriculture, I don't know. We'll trade the things that we're good at for the things they're good at. It's, it's not a very smart model. It's, uh, you know, pretty basic. It describes some things that happen, but not a lot of things.

   26. OCOren Cass38:47

       Right.

   27. NSNoah Smith38:47

       And then if you use a sort of a slightly more advanced model called the Heckscher-Ohlin model, which predicts, you know, that capital-intensive countries like America will do more capital-intensive things, China inten-- Chi-- labor-intensive countries like China in the 1990s and 2000s will do labor-intensive things, that predicts that we'll lose lots of manufacturing jobs to China. So those basic models would predict that the US manufacturing sector, or at least US manufacturing employment, would do poorly in the face of China, in the... Due to free trade with China, but that America overall would become enriched because of other effects in the service industry and other industries. And so when you're talking about these predictions that free trade with China would be, uh, beneficial for our manufacturing sector, I have to say, I don't know where they are. I don't know who made them. I don't know why they would have made them.

   28. OCOren Cass39:30

       Yeah. I guess I'm, uh, I, I'm... And, and I, I guess I'm just-

   29. NSNoah Smith39:33

       Sounds made up

   30. OCOren Cass39:34

       ... making the point more sort of, uh, sort of thinking about as a counterfactual. We could either take the view that, yes, tariffs are probably helpful in, in, uh, in protecting a manufacturing sector, or no, they're counterproductive. And y-you were sort of asking me, you know, w-why would you believe that these things help? And I'm saying, well, I think there are a lot of sources that, that would point to them potentially helping. What I'm less clear on is, is what is the argument from the other side? What, what is the argument that no, actually, if, if you have, you know, that, that we should get rid of our tariffs to help the manufacturing sector? Because presumably one or the other has to be true. Either tariffs are good for the manufacturing sector or tariffs are bad for the manufacturing sector. I'm suggesting they're good for the manufacturing sector. I, I took you to be saying you think they're bad for the manufacturing sector, but I'm not sure... That, that's where it breaks down for me, right? Because at least vis-à-vis China, as you were just saying, I, I don't know who is saying they're bad for the manufacturing sector.
10. 45:24 – 52:23

    Trade Deficits and Scale

    1. NSNoah Smith45:24

       the reason of scale. Now, there is a... You won't get this in Econ 101 or even 102, but you will get this from Paul Krugman's Nobel Prize-winning work, uh, wh- where he talks about the importance of scale for manufacturing, uh, industries and just-- and for industry in general, but manufacturing is the most important, uh, industry that this works for. Whereas the more stuff you can sell, the more units you can make, the lower your costs go. So if you can make, you know, a million cars, you can make cars a lot more cheaply than if you only make ten thousand cars. The more you can make, the more... the better you get at making stuff. Now, China has unprecedented internal scale because they're a country four times the size of America, right? So they can make just tons of units of stuff. America can't match that with just our domestic market. We can pay more per car, but in terms of the scaling effects, the scaling effects depend on how much you make, you know, how many things, how many cars roll off your assembly line. And we are just such a small country compared to them. We're one quarter of their size. This is like us trying to match China is like Germany trying to match us. You know, Germany can make really high-quality stuff, but they can't match us volume for volume, and so they, they'll never be able to get the scaling just from only their internal market that we get. And so that's why Germany focuses on exports, exports, exports. So what we need to do is find some other countries where we can say, "We, our manufacturers get scale from exporting to you, and your manufacturers get scale from exporting to us, and we both get scale." And then we have this mutually beneficial agreement to scale our manufacturing industries such that we're not playing only in this tiny domestic market, such that we have a large market too, so we can compete with the Chinese because we can match them for scale. Now, the only way to do that, given our small size, is to get other countries to pool their market with us so we can get scale, right? We need Europe and Japan and Korea and maybe India, which is the biggest country of them all, uh, to, to partner with us so that we can scale. But that requires some reciprocity, right? We need to have our manufacturers be able to scale by using their markets, but their manufacturers also need to be able to scale by using our markets. And then as Krugman showed, we make, you know, our manufacturers and their manufacturers make similar things but slightly different things, slightly different versions of the same things. We'll make Harleys, they'll make Kawasakis. You know, so then, um, uh, you know, competition happens by differentiation. That's fundamental to Krugman's model, and it's what we actually see in, for example, US-Japan trade. We make sim- ge- broadly similar stuff but not exactly the same, and both can flourish. So that's drawing from advanced economic theory, not the basic stuff you get in Econ 101. That's what I would do to resist Chinese manufacturing. I would get scale by pooling our markets with our friends. And if you look at what, for example, Elon Musk has said, Elon Musk said, "We need a complete free trade zone with Europe so that we can all scale." Now, if there's one American who actually does know about manufacturing, it's Elon Musk, and, uh, who's the only entrepreneur who's been able to successfully scale manufacturing in America, you know, even in the face of international competition. And it's been pretty credible because his supply chains are far more domestically sourced than most manufacturers. But when he says we ought to combine our markets with, you know, Europe's markets so that we can all scale together, he's-- that's directly out of Krugman's theory. It's directly out of lived experience in manufacturing. So that's what I would do.And then, and then, you know, penalize China.

    2. OCOren Cass48:44

       I mean, I, I should say I, I agree with almost all of that and, and would like to see that as the American trade strategy. I, I think the concern I would have is that, you know, those three countries that I think Noah rightly focused on Germany, Japan, and Korea, you know, relative to their GDP, our, our trade imbalance with them is, is as large as it is with China. You know, when you, when you describe Germany's strategy as export, export, export, that is of course Japan's strategy and, and Korea's strategy certainly vis-à-vis-

    3. NSNoah Smith49:16

       Not Japan, though.

    4. OCOren Cass49:17

       Vis-à-vis the US.

    5. NSNoah Smith49:19

       Vis-à-vis the US.

    6. OCOren Cass49:19

       Vis-à-vis the US. And so it-

    7. NSNoah Smith49:21

       Not Japan.

    8. OCOren Cass49:22

       I mean, just talking about the size of the, of the trade balance in goods between the US and Japan, um, it, you know, Japan turn imports from, uh, certainly a lot from China and others, but it seems to me a fundamental problem that the US is dealing with in, in ideally constructing that sort of, uh, trade model is that these key countries that we want to be our allies in scale are them- themselves pursuing this kind of export and export and export, but don't import model. And that's why I think it was very interesting to see, you know, the EU in, in the, uh, start of the agreement that, that they've been announcing with the US, you heard the EU leaders say quite explicitly, you know, "We acknowledge that we are going to have to do some rebalancing here." Um, so I know, I mean, Noah, maybe you, maybe you just disagree that there is an imbalance there, but it, it seems to me that as we move toward that model that you're describing, if it is going to work for the US, there is going to have to be a, a significant shift in the behavior of these trading partners.

    9. NSNoah Smith50:29

       Right. Okay. So I actually have an important response to this, which is something I think that almost everyone in these trade policy discussions gets wrong, which is they focus on net instead of gross exports. So let me give you a concrete example here. If we export zero to Germany and Germany exports zero to us, and then we go to exporting ten billion to Germany and Germany goes to exporting twelve billion to us, we have opened a trade deficit with Germany, right? We now have a two billion dollar trade deficit, but our exports have gone up by ten billion. And this is a good outcome for us because it allows our exporters to scale, scale, scale, because what matters is the gross amount, not the net amount. People focus obsessively on the trade deficits and surpluses, on the imbalances, on the net amount. But basically, if our... And, and of course, only the people watching on video can see this, but if, you know, here's Germany, here's us. If they both grow and Germany's grows a little bit more, that's actually a good outcome even though we have a trade deficit from the perspective of scaling our manufacturing industries and of course increasing GDP. But scaling our manufacturing industries and getting manufacturing power, the deficits and surpluses matter less than the total market size available to our manufacturers. And so I think we, you know, obviously trade deficits are always a sore spot because people have an inherent sense of fairness and they worry about this stuff, and that's fine. I understand that. We need negotiations and we can try to rectify those things. It's complicated because there's also financial effects on trade deficits, so it gets hard. We can talk about that later, how to fix trade deficits. But, but if you're ju- I think the more important effect is the gross, the total, the total amount of exporting that we're able to do, you know? And so in that sense, trade between us and Europe is positive sum without trade, you know, being balanced. Like, trade is positive sum. Uh,

11. 52:23 – 1:02:40

    Global Competition

    1. NSNoah Smith52:23

       and I'm not talking about comparative advantage, you know, your standard Econ 101 stuff, right? I'm talking about advanced Paul Krugman stuff. I'm talking about what Elon talks about. I'm talking about just manufacturing and scale, scale economies. And I'm saying the total amount we export to these allies is more important than the delta at the edge-

    2. OCOren Cass52:42

       Right

    3. NSNoah Smith52:43

       ... of deficits.

    4. OCOren Cass52:43

       But I, it seems to me that that assumes that the, that the act of trade itself is somehow expanding total demand for manufactured goods. And like what I mean-

    5. NSNoah Smith52:54

       Right. It is.

    6. OCOren Cass52:54

       But not, certainly not by one to one. I mean, if, if we talk about-

    7. NSNoah Smith52:58

       No

    8. OCOren Cass52:58

       ... like cars as an example and you ask like, in which case does US car manufacturers have a bigger market in the zero zero case or when the US is exporting ten billion of cars to Germany, but Germany is exporting twelve billion of cars to the US. Un-unless you've created an extra two billion dollars of demand for cars, you've just reduced US car sales, right?

    9. NSNoah Smith53:29

       Um, hmm, so if... No. You... Well, I mean, the point is that you do... So if you-- if we export ten, um, if we export ten billion dollars worth of cars to Germany, I'll, I'll talk in, in numbers but let... I'll talk in dollars, but let's assume it's all the same price.

    10. OCOren Cass53:50

        Yeah.

    11. NSNoah Smith53:51

        Okay. Of course. So if we export ten billion more to Germany and Germany exports twelve billion to us, right? And, uh, you know, so then what matters for the total amount of cars we can ma- that our manufacturers can make is whether the induced reduction in domestic sales is larger than the ex- induced increase in exports of Germany.

    12. OCOren Cass54:14

        Right.

    13. NSNoah Smith54:14

        So if Germany exports twelve billion cars to us and our domestic car sales go down by six billion, let's say, right? Our domestic car sales go down by six billion, our exports go up by ten billion, our total car manufacturing has gone up by four billion, even though Germany's-- even though we're running a trade deficit and Germany's car exports to us have destroyed some domestic demand for American-made cars. But the amount they destroyed was not, uh, sufficient to balance out the amount our exports gained.

    14. OCOren Cass54:45

        Right.

    15. NSNoah Smith54:45

        And so the point is that, um-When you, when you have, um, two countries and they start trading, does the number of cars that people consume go up? Absolutely. Does it go up by more than the number of cars, you know, th-than the imbalance, than the trade deficit-

    16. OCOren Cass55:07

        Why does the number of cars go up?

    17. NSNoah Smith55:08

        Pardon?

    18. OCOren Cass55:09

        Why does the number of cars go up?

    19. NSNoah Smith55:10

        Why would the number of cars... Oh, 'cause, 'cause, 'cause cars are, are just-- 'cause cars are cheaper. 'Cause remember, we're scaling, scaling, scaling. That allows us to make cars more cheaply, and when cars are cheaper, people buy more. You get that second car, that third car for your family, and even people who don't own a car could now have a car. Um, you can also get more expensive cars, but that's another story. But then, um, but scaling, just in terms of scaling, if we drive those costs down by increasing the size of the market, then people are buying a lot more cars overall. And so if you look at vehicle ownership in America, you know, during the time that Detroit was facing this in-incredible competitive pressure, right? Like, you actually saw Americans buying more cars, and you saw people in these other countries buying more cars. And then, you know-

    20. OCOren Cass55:57

        But you also definitely saw a decline in demand for the American-made cars, right?

    21. NSNoah Smith56:00

        You saw a decline in domestic ma-demand for the American-made cars.

    22. OCOren Cass56:03

        No, total.

    23. NSNoah Smith56:04

        Right. But if you look at GM, if you look at GM total vehicle production-

    24. OCOren Cass56:07

        While you're looking that up, I... Let me just make two related points. O-one is that this strikes me as a, a classic example of what goes wrong in our economics dialogues where actually-

    25. NSNoah Smith56:16

        Oh, yeah. GM sales were going up and up and up.

    26. OCOren Cass56:18

        Yeah. Where, where-

    27. NSNoah Smith56:19

        Total sale even despite the competitive pressure from Japan, from Germany, GM's, you know, total global sales-

    28. OCOren Cass56:26

        Yeah. No, no, no

    29. NSNoah Smith56:26

        ... were going up.

    30. OCOren Cass56:27

        No, no. Domestic production in American factories.
12. 1:02:40 – 1:12:34

    Negotiating with Allies and the Limits of Tariff Threats

    1. OCOren Cass1:02:40

       love those things. I'm giggling because it, it's, it, it is an interesting, uh, inversion of what we are seeing happening today, where the Trump administration argument is, "Wait a minute. We, we have a, an extraordinarily open market. We have been defending these countries, and the result has been these imbalances." If we are going to sit down and negotiate with them over that, Noah, exactly to your ear- earlier point about game theory, we should use market access and our commitment to their defense as tools to force them into a position that we like better. And based on everything you'd said up until the last minute or two of the discussion, that would seem to me to be a, a position very consistent with your views. But then when we got to the point of actually saying, "Great, what should we do about Europe?" It was sort of like, "Well, what else can we bribe them with? Can we offer them even more market access? Can we promise to spend even more on their defense?" And I'm just not sure why that's the approach we would take.

    2. NSNoah Smith1:03:41

       I don't know. I, um... So if we're saying that we're gonna use the threat of tariffs to establish a free trade zone, you know, that's... Uh, but the, but the, because of game theory, because the idea that actors are rational and we won't have to use the threats and hurt both us and our allies, uh, you know. If, if that's the idea, then I have to say, well, it's not really a credible threat. It's only a credible threat if we're nuts. You know, the idea that we would hurt ourselves and our... And China, you know, the idea that we would use tariffs as a threat against China, a country that, you know, we wouldn't mind seeing taken down a peg, seems rational to me because you could use that as a credible threat. If we follow through and hurt China more than we hurt ourselves, that's a credible threat. But hurting Japan and Europe more than we hurt ourselves, but hurting both of us, actually just lets China win. So it doesn't seem like a credible threat to me. I don't feel like putting... First of all, it doesn't seem like a credible threat, so this doesn't seem like a good negotiating tactic to me, because if we go through with the tariffs, as we currently are going through with many of those tariffs, not all of them, but 15% or something on our allies. Okay, if we go through with that, even as we surrender to China, but that's another story. Even if, you know, if we go through with that, okay, it just means China wins, and so it's not a credible threat. So that's my first point in response to this idea. The second point is, if this is your argument, we're back in the realm of tariffs are bad, but they're a good threat because we're threating, threatening to shoot ourselves in the foot, you know, in order to, in order to get this free trade equilibrium that we like. So the idea is tariffs are bad, f- you know, free trade is good with our allies, but we need tariffs, we need tariffs as this tool to threaten them to sort of, you know, get it, get to free trade with allies through the back door. That's very different than saying, "Behind these sheltering protective walls, American manufacturing will regrow because economists don't know what the fuck they're talking about." And so those are two important points. The fact that this is a non-credible threat and the fact that it, tariffs as a threat are different than tariffs as a long-term actual policy, and we appear to be doing the latter. So those are two important counterarguments, I think, to what you're saying here.

    3. OCOren Cass1:06:08

       Yeah. I guess I would just say on, on the first point, first of all, it, it apparently, at least at the moment, is a credible threat. I mean, the administration is using it, and I think certainly the reporting on the EU negotiation indicates that they were quite frustrated by how credible the threat was and the extent to which it therefore forced them to, to make a lot of concessions. I, I do think the sort of other way of looking at it, which is like, well, the, the US has to kind of first and foremost be thinking a- about everybody's wellbeing. So these other countries can adopt policies that really are beggar thy neighbor and, you know, we can't do anything about it. That, that i- that was certainly the kind of post-World War II, we must preside over a, a liberal world order argument.I, I, I don't know how much it makes-- how much sense it makes now given the costs that the US is, is sustaining under the status quo. And, and so I, I do think the, the negotiations are... It is not as, as sort of clear-cut a game theory as, as you were describing. Um, and, and then on the second point, I would, I would just say it, it's interesting and, and, and quite satisfying perhaps to the extent to which we are landing in, in a, a very similar place at the end of this, which is, you know, my view about certainly the, the so-called reciprocal tariffs and the, the way the administration has spoken about the reciprocal tariffs is that, uh, they in fact see them as negotiating leverage, and their goal was to strike deals with these countries, um, but to have these countries commit to balanced trade. I mean, that was quite explicitly-

    4. NSNoah Smith1:07:53

       Right

    5. OCOren Cass1:07:53

       ... you go-- But, you know, I think Steven Miran's remarks on this, the Hudson Institute are clearest. We seem to agree that tariffs on China do make sense and that our relationship with China-

    6. NSNoah Smith1:08:03

       Well, not, not all, but tariffs on, I would say, strategic industries with China. I don't think we, you know, need tariffs on Chinese clothes, because if China makes clothes, that's not a national security threat to us.

    7. OCOren Cass1:08:14

       Okay. But, but that, that China is sort of a-

    8. NSNoah Smith1:08:16

       Toys

    9. OCOren Cass1:08:17

       ... a-

    10. NSNoah Smith1:08:17

        I don't give a shit if China makes our toys. Let them make toys.

    11. OCOren Cass1:08:21

        I, I, I think that's fine. I think there, there remains a, a balance question there and a question of sort of what core inputs, um, still do and don't matter to us. But point being, China is sort of in, in a separate category.

    12. NSNoah Smith1:08:35

        Yeah.

    13. OCOren Cass1:08:35

        I think maybe where we would probably end up disagreeing the most is on the question of, of a sort of baseline tariff. And that's where, you know, my view has always been that a baseline tariff on the order of ten percent, um, is a sort of skewing of the playing field in international trade, um, in a way that helpfully reflects a preference for domestic production. And that if you could do it in a way that actually had long-term certainty and predictability, uh, and if you could actually also then use it as a revenue source, which meant that relatively speaking, you're also need less revenue from elsewhere, that it would be a, a very good element of what is otherwise a quite skewed global trading system. And so, you know, that's, uh, that's sort of how I look at it. I, I think, you know, certainly we don't agree on all the pieces of it. But, uh, it seems to me there are pieces of it that we do agree on and also that the, uh, the, the intuition of those who are pushing for this kind of approach, myself included, I, I think there's a lot to debate, but also that it is not the kind of, um, you know, uh, baseless and unfounded and, and incoherent way of thinking of things that, that it sometimes gets presented.

    14. NSNoah Smith1:10:01

        Assuming tariff policy gets con-- pretty much continued, and then we have somewhere around the fifteen to twenty percent tariffs that we're going for right now. Suppose that continues, and suppose our manufacturing sector continues to not flourish. Manufacturing's, uh, investment continues to be-- to, to weaken and deteriorate. Manufacturing orders continue to weaken and deteriorate. At what point, how many years will it take for you to say, "Oh, maybe I should have read an economics paper or two. Maybe economics isn't all just hooey and bullshit, you know? Maybe the economists were onto something." How many years must I wait for you to sort of update your ideas there, assuming that all that continues?

    15. OCOren Cass1:10:46

        Yeah. I, I think it's an unfortunate way to end the conversation given that we both know that I've read lots of economics papers on these topics, and we-

    16. NSNoah Smith1:10:55

        I, I was being, uh, you know, figurative.

    17. OCOren Cass1:10:56

        Yeah. Well, you also wrote a very long Substack that wasn't at all figurative making the same accusation. So, uh, I, I don't think that's a constructive way to, to conduct the conversation. On, on the substance of the question, uh, I... What I would say is that I think we need a year or two to see whether or not you actually get the investment response. Secondly, and related to that, I think it's very important to see whether you get the useful accompanying policies. That is, if what people are saying is, "We really want to invest, but we can't because of workforce," we do need to actually address the workforce stuff. If a couple of years from now you are not seeing the investment response and either we can't do the workforce stuff or for political economy reasons it is not feasible for us to do that stuff, then I, I would be the first to admit this is apparently not an effective strategy for, for pushing toward reshoring.

    18. NSNoah Smith1:11:52

        Got it. Well, that seems reasonable to me. Erik, take it, take it away.

    19. ETErik Torenberg1:11:58

        Yeah. No, I was, I was gonna ask if any of you wanted a, a l- a last word, but I, I, I feel like this has been a constructive, um, conversation. As, as someone who's not an expert in, in these topics, I feel like being able to hear the, the discussion and debate, uh, kind of in real time and understand bo- you know, both positions better has, uh, has been edifying, and I, I really appreciate you guys coming on and having a discussion.

    20. OCOren Cass1:12:17

        This was a lot of fun. Thank you for having me. [outro music]

Episode duration: 1:12:44