Is America counter-punching in a long-running trade war, or shooting itself in the foot? Economist E.J. Antoni, Unleashed Prosperity Senior Fellow and Heritage Foundation economist, joins Maggie Lake to dissect the White House’s tariff rollout, trade strategy, and the Fed’s credibility crisis. Antoni warns that a botched tariff formula is rattling allies and markets, even if the long-term goals may be sound.
In this must-watch conversation, Antoni explains why:
- The U.S. isn’t starting a trade war, it’s finally fighting back
- A flawed rollout is sowing confusion among trading partners
- Tariffs may sting now but could revive U.S. manufacturing
- Deregulation and tax reform (not tariffs) will move the economic needle most
- The Fed’s mixed signals have shattered market confidence
- Runaway spending could spark a bond-market revolt and send gold even higher
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E.J. Antoni 0:00
People don’t seem to understand that we’ve been at war. We just haven’t been fighting it. This is, this is part of the the nonsense of these arguments where they say Trump is starting a trade war. No, he’s fighting the trade war.
Maggie Lake 0:17
Hello and welcome to wealthion. I’m Maggie Lake, and today I’m joined by EJ Antoni, unleash prosperity, senior fellow and economist at the Heritage Foundation. Hi, EJ, it’s great to have you on Maggie, my pleasure. Thank you for having me. I’m looking forward to talking about some prosperity. So thanks for being with us. So we’re at a really interesting juncture. I think we saw a big swoon in stocks in April and then a big recovery, but there still seems like there’s a lot of uncertainty around the economy and what’s going to happen. So let’s start very broadly with your outlook. What are you expecting from the US economy? Well,
E.J. Antoni 0:49
uncertainty is exactly the right word, Maggie. We’ve gotten that in spades ever since April 2 with, frankly, the botched rollout of the administration’s whole tariff plan. What are we looking for in terms of, you know, the weeks and months ahead? I think we’re going to see some good trade deals hammered out with with a lot of key trading partners, although I would note, I think we’re going to see more so trade deals with China’s key trading partners before we even get them with our own. So that would be countries like India, like Japan, like Australia. We’ll probably get those done before we get things like Canada or Mexico or certainly anything from the EU, I would imagine. So we’ll get more trade deals done. They’ll probably be bilateral nature, so just between the United States and those respective nations and the I think the end result will be no diminishment in terms of United States access to foreign products, but an increase in terms of United States exporters access to foreign consumer markets. So that looks like more American exports, which translates into a greater demand for American labor, which means more jobs and faster wage growth here at home, it’s going to be a bumpy road, though. I’m not by any means suggesting that we’re going to get there overnight or that we’re going to get there without any hiccups. We’ve obviously already had quite a few hiccups, and I would not be surprised if we get another one or two quarters of of negative GDP growth. We’re, you know, we’ve already seen a huge attempt to front run these tariffs, and some of that is going to certainly spill over into the second quarter as well, because April, which should have started the tariffs, turned into a 90 day pause. So now you’re really not looking at the bulk of these tariffs potentially starting until q3 so if you thought the front running of tariffs in the first quarter was bad, the second could be just as bad.
Maggie Lake 2:38
So there’s a lot to unpack there. Why do you why do you think it was a botched rollout?
E.J. Antoni 2:43
Well, for a couple of reasons, not, not, the least of which was the fact that we were promised reciprocal tariff rates. Right? We were told that the whole reason the administration needed to wait from january 20 all the way until April 2 was because they needed to figure out what are all the tariff and non tariff barriers that these other countries are charging us, and from that we were supposed to get a tariff rate schedule. Well, in fairness to the administration, these tariff rates are incredibly difficult to calculate. Maggie, I mean, it’s one thing to say, all right, a country, country A imposes a 10% tariff on literally everything we send them, and that’s all they do. Okay, simple enough, then the reciprocal would be a 10% on everything they send us. But what about countries like Canada that have incredibly complex non tariff barriers, that includes things for Canada, like quotas. It also includes other things like currency manipulation, although that’s more so something that China does. But whatever the case it the fact is, Maggie, a lot of our exporters have a harder time getting their products into Canadian markets than they do into Russian markets. I think that’s insane, but that’s the reality of the situation. So what happens with a country like Canada is they’ll impose a tariff that says, All right, once we import a certain amount of American butter, and it’s a relatively small amount, anything above that is going to get slapped with like a 300% tax effectively. Well, what American dairy farmers do is, once they get anywhere near that, that export quota, they just stop exporting stuff to Canada, because they know that anything else will be prohibitively expensive and they won’t be competitive at any price given a 300% tax. So the consequence is there’s no actual revenue that comes into the Canadian Treasury at that tariff rate. So if we look at the books, it appears as if no one is actually paying that tariff. So the effective tariff rate is technically zero. It Maggie. It’s like, if I tell you I’m going to tax, let’s, let’s say whiskey at 1,000% and whiskey sales all of a sudden plummet down to zero. And I look at that and say, Well, no one’s actually paying the whiskey tax, so it effectively doesn’t exist, right? Market takes again. These are incredibly difficult things to try to evaluate every time China devalues the offshore. Yuan, it’s now setting a new record low against the dollar basically every day as that happens, how do you measure that? How do you quantify the offset there, in terms of the artificial incentive that China has created for sending their stuff to American markets, and therefore making it impossible for American producers to compete with those Chinese products. Again, very, very difficult to calculate. It made sense that they needed until April 2 to calculate all this stuff. Then the President holds up these, these, these billboards, essentially, these, these, like poster boards with all these tariff rates on them that have nothing to do with countries tariff and non tariff barriers. They They literally just took the the ratio of imports to exports, and subtracted one, and that’s it. And that was, that was the supposed tariff rate, and then they divided it by two, I suppose, to show our magnanimity. I mean, it’s just, it’s insane, but, but that’s where we got these numbers from. It had nothing to do with tariff and non tariff barriers that other countries impose on us. That’s an
Maggie Lake 6:03
important point, because if you’re going to try to reorder global trade, one would think you really need to get at the root of what’s happening, which you know, as you point out, is extremely complicated. Do you think that hurt the administration’s negotiating stance or negotiating leverage, the rollout and the some of the math around it.
E.J. Antoni 6:26
So it hurt them tremendously. I recently just met with with the delegation of key business leaders from South Korea, and they were essentially acting as a go between for their government. And the biggest question they had for me was, what are we supposed to tell the government to offer as a bargaining chip like we don’t know, because we look at these tariff rates and we have no idea what we’re supposed to do. Essentially, the tariff rate comes down to the goods deficit and the overall amount of trade with these foreign countries. In other words, if we have a deficit of goods, then we’re slapping them with penalty high tariff rates. So you know, random example here. Let’s say we buy chocolate and Swiss watches from Switzerland, and in exchange for that Swiss chocolate and those Swiss watches, we sell them financial services. And let’s say we have we sell them more in services than we buy from them in terms of products. We have an overall trade surplus with those nations, but because we have a deficit of goods, we slap them with a penalty, high tariff that that’s the insanity of what, what’s going on behind the scenes in these tariff rates. I mean, Maggie, it’s it’s so bad that one of the papers, one of the, you know, econometric papers that were cited in terms of the the reasoning behind this formula had four authors, all of whom were economic economics PhDs, so all pretty bright guys, ostensibly, one of them actually had to publicly come out and say, You are misusing our formula. Not not. You didn’t. You didn’t ask permission to use our formula. But rather, this is a misapplication the formula does not work the way you’re saying it works. You can’t, you can’t do this. And I mean, so again, it’s just to illustrate the crazy, craziness of this. Now back to your question, though, the the the administration’s credibility was absolutely hurt by this, because, again, these foreign businesses and foreign leaders are now having to come to the table, scratching their heads, saying, we don’t even know what you want us to do. We don’t know what we’re supposed to offer. I mean, this was a breakdown in communication and a breakdown in negotiations, and not a buildup of one. So it definitely hurt the administration, no doubt about it. What do you
Maggie Lake 8:37
think that’s done to the window and what’s happening at the negotiating table now, if you’re hearing concerns that they don’t even know where to start, what does that mean in terms of how long it’s going to take to iron these out? And do you feel like or are you hearing that progress has been made, and maybe some of the initial confusion is clearing up, because we hear that there are talks going on, although we don’t have much information or transparency about that.
E.J. Antoni 9:03
Oh, certainly, yeah, we know there are some talks going on. I’m hearing that publicly. I’m also hearing it through some of my inside contacts. Unfortunately, though you’re right, there has not been enough transparency on this front, just like there wasn’t enough transparency in terms of how they came up with these tariff rates to begin with right now, that being said, this has, I think, been an overall pretty transparent administration. But again, this did not have to be this way. This could have been handled much, much better. You could have had just as much disruption and turmoil in overseas markets without having it here at home in our own markets. But whatever the case, we are, where we are, how do we get out of here? I think that that looks like again, getting these trade deals across the finish line. I think some of the key trading partners are getting pretty close to a deal. We’re already seeing significant progress on some of those talks. Again, India and Japan are good. Examples of that, I would not be surprised if we get a deal within the next few weeks, bilateral deals with both of those nations. And again, this, this craziness and this, these disruptions, were the reason for the 90 day pause. It was getting to be too much for markets. We were seeing the basis trade implode. Treasury. Markets were getting threatened. The amount of chaos just got to be too much. And fortunately, President Trump was willing to listen to Scott Besson, to Howard lutnic, the secretaries of Treasury and Commerce, respectively, and was able to get this 90 day, much needed 90 day pause in place. Yeah,
Maggie Lake 10:36
so India and Japan, significant economies for sure. Do we need to see China, Canada and Mexico before we can before investors can have confidence that we are really moving ahead on the trade deals?
E.J. Antoni 10:57
I don’t think you’re going to see vest investors really willing, especially the institutional investor, really willing, to plow all of their capital in and take it off the sidelines until we get deals done with all major trading partners. I mean, even even countries that you might not consider major trading partners, some of what look like relatively small members of the EU or even some South American countries like Brazil, if you can pick a consumer product where, where we primarily outsource it, where we primarily import that product, I think you’re going to have to see a major trading deal with with all those different countries again before everyone is really willing to take their capital off the sidelines and put it back to work In the market. I mean, and look, the amount of liquidity that got yanked after April 2 is really rather tremendous, and rightfully so, because investors have no confidence. Sentiment is just, I mean, it’s in the toilet, quite frankly, because people don’t know which way these things are going to go. It’d be one thing if you presented the market with bad news, and it was definitive, but it hasn’t been. And speaking to that fact, speaking to that is the fact that when this was all announced on April 2, the first thing that was announced was the flat 10% across the board tariff. And how did markets react? They rallied about one and a half percentage points on the news because they thought, Okay, that’s it, a 10% tax. We can deal with that at least now. We know, and we can plan for the future. And then we got this crazy tariff rate schedule, and after quickly realizing that the numbers were made up, markets plummeted. And we’ve been, you know, we’ve been on a roller coaster ever since, I understand we’ve recovered a lot of those losses, but that primarily has to do with deal with two things. One, the fact that we got this 90 day pause, and two, the fact that we continue to see carve outs and exemptions for different industries and different special interest groups across the United States. And that has all created an environment where you’re getting an increasing amount of certainty, even if it is at least, even if it is temporary, you’re at least getting, you know, again, some temporary relief.
Maggie Lake 13:05
It’s it’s interesting. You I, I hear the frustration in your voice, but overall, are you are do you believe that this is the right policy, course, but you have issue with the execution, or do you have doubts that this tack they’re taking on trade, the administration is taking on trade, is going to get the desired results? Maggie,
E.J. Antoni 13:34
great, great question. And, gosh, we got to go a little into the weeds here. It depends on who you ask in the administration that’s and that’s part of the reason for so much uncertainty. Depending on which talking head wants to get in front of a microphone, you’ll get a completely different story. And this is one of the reasons why you know when, when Scott Besson and Trump really seem to be the primary leaders, especially in terms of negotiations here, I think markets really started to calm down when you would see Howard lutnic Get up to the microphone. This is our Commerce Secretary, and in an interview, I think it was with CNN, he starts talking about how these tariffs are going to bring back all these American jobs. And the person interviewing him rightly pointed out, you know, look, even with these these tariffs, this Tariff Schedule, the labor differential between other nations in the United States is still large enough that it usually is not going to be worth it to make stuff here. And he responded by saying, well, we’ll just make stuff here with robots. We won’t use labor. I’m sorry, Mr. Secretary, which one is it? In the span of literally two sentences, you went from saying more American jobs to more American robots. Again, which one is it? Greer, when he gets up to the microphone, he’s all over the place. When Who is it? The one of the trade advisors, I can’t believe in blank, has named, Oh, Peter Navarro. You know, when he gets up to the microphone, he is just, I mean, you can hear anything and everything come out of his mouth. He starts talking about how these tariffs are going to generate. Rate, trillions of dollars in revenue. Except to make that happen, you would not only need to increase the rate on these of these tariffs, you would need to increase the amount of air national trade. In other words, increase the tax rate and increase the tax base. You need to increase both multiple cans in order to increase the actual product there. Well, the problem is, as you load more and more of these tariffs on, as Navarro himself has rightly pointed out, you will shrink the tax base because you are disincentivizing international trade, which is why Navarro says all of these tariffs are going to bring back all of this manufacturing, rebuild the industrial base. All right, that’s fine, but now we’re trading less around the world, which means a smaller tax base, which means less tariff revenue. So I’m sorry, Navarro, but you can’t have it both ways. You can’t say this is going to bring in, you know, trillions upon trillions of dollars and eliminate the income tax and then also say that it’s going to collapse international trade and we’re going to make everything here at home again. Which one is it? Okay? So if we stop listening to all those folks and we just listen to Trump and Besant for a moment, what’s the message? The message is, in the post world war two order, we have created an environment on purpose, initially, where we were going to prevent American products from getting sent around the world because we were trying to rebuild the economies of Germany, of the United Kingdom, of Italy, of Japan. Why? Because we flattened all of their cities with bombs throughout the war. I mean, Berlin was flattened. Most of Italy flattened. London, mostly flattened. Tokyo, very flattened. And so again, you had to essentially stop America from competing with those domestic industries so that those domestic industries could rebuild. There’s no reason why the German automotive industry should still be protected, protected from competition from the American automotive industry. There’s no reason why we shouldn’t be allowed to sell all of our products in a country like Japan or in the UK, you name it, France, Spain, I can go on and on. So the point here, Maggie, is that all of those trade barriers, whether they were tariff or non tariff, that, again, that could be anything, anything from quotas to currency manipulation and anything in between. It includes IP theft, even, which is big in China, all of those barriers to trade have essentially made it impossible for different American industries to compete in different places around the world. That means less demand for American products, which translates into less demand for American workers, slower wage growth and less employment here at home is the end result. We want to fix all that. We want to put the American worker back on a level playing field with the rest of the world, and so these these tariffs, are essentially a way to bully those nations into giving us that fair deal. What we’ve really had Maggie is a kind of unilateral free trade, if you want to look at it that way, it’s just been a one way street where the American benefit, the American consumer, has benefited tremendously from having access to countless products at very cheap prices from all around the world. That’s been great. That’s been the benefit of globalization that we have received, but because we haven’t had, again, a kind of bilateral free trade where it goes both ways, and this is where the President talks about free but fair trade. We haven’t been able to export our stuff around the world, so foreign consumers have been hurt Absolutely because they haven’t had access to cheap American products, right? All this American stuff at reasonable prices. But at the same time, our exporters have been hurt too. And so we want to turn that one way street into a two way street. I think that’s a very laudable goal. I can even understand the use of tariffs in terms of getting that done, but, but there’s just no excuse for how these tariffs in particular were implemented. And so if, if you’re sensing any frustration on my part, I should emphasize it’s not necessarily the fact that we’re that we’re pursuing a tariff strategy, but rather it’s how this was all rolled out. I think
Maggie Lake 19:02
that’s going to resonate with a lot of people, because I’m sure there are people are listening who also agree that, you know, there needs to be changes. I think there are a lot of investors. I’ve certainly talked to a lot of macroeconomic analysts who say, you know, we sort of overextended, and there is a rebalancing that’s needed, because there are big imbalances in the global economy, and it’s not good for anyone at the end of the day. So certainly something like that that is needed. However, as you point out, how we get there, and whether this makes sense, and what the real cost of that is, especially short term, I feel like there’s some gaps there, and it can come off as sounding everything is kind of politicized. And I don’t think, I don’t think that’s where it’s coming from. So let’s, let’s tackle a couple of the sort of voices that have come out. And we talked about the consumer over the weekend. The President said, Well, maybe everyone doesn’t need so much stuff. I think is what he was getting at. Maybe, you know, we’re all going to have to endure a little bit in the short term in order to kind of get this longer term prosperity that they see. But it’s not just consumers getting cheap stuff. It’s all the companies that source that cheap stuff. And there was a lot of attention over the weekend, the CEO of a logistics management company was quoted in The Wall Street Journal, I don’t know if you saw it, saying an asteroid is coming to destroy America’s businesses. If they don’t change the tariffs, it’s going to be and I’m quoting here, an extinction level asteroid wiping out the dinosaurs. Kind of event, only these aren’t dinosaurs. They’re dynamic, healthy businesses. And so again, I think it’s the concern about the execution, the speed in which this is happening, and that we’re going to get to this cliff where we’re going to have empty store shelves, shortages, businesses who can’t pay to get the products that they’ve been bringing in, and there hasn’t been enough time to adjust. Is there a risk we see waves of bankruptcies and the burden fall on small and medium sized businesses. I
E.J. Antoni 21:02
don’t I think a lot of those risks are overblown. You know, Maggie, I actually just less than a week ago, I did a debate down in North Carolina where one of the one of the other people I was paneled with. I forget the gentleman’s name off top my head, but he, he basically owns a lot of very cheap retail stores. And I don’t mean that disparagingly, these are just discount retail stores. In the same way that Walmart is a discount retail store, it’s massive, whereas most of what he owns are chains. So for example, he bought out big lot, Big Lots when they were in bankruptcy proceedings. I think that was last year. So essentially, almost literally, everything he sells comes from China, and it’s all incredibly cheap. So of course, he is speaking out saying, you know, these these tariffs are terrible. They’re going to cause all these costs to go up for for American consumers, and so on and so on. But what was interesting was that he was perfectly okay with with tariffing The, you know, what, out of cell phones, right? Saying, Oh, no, you can tariff those, because that won’t get passed on to the consumer. You can tear off all these other high end electronic items or big items like washers, clothes washers, dishwashers, clothes dryers and other appliances, microwaves. Why? Because he doesn’t sell any of those, right? So he doesn’t have to worry about his margins taking a hit. He’s okay with everyone else’s margins taking a hit. So you know all of these goals in terms of reshoring American manufacturing, rebuilding our industrial base, putting the American worker back on a level playing field with all of his foreign counterparts. That’s all okay, provided he doesn’t have to bear any of the cost of it, which, frankly, is just kind of hypocritical. Well, it’s the
Maggie Lake 22:39
traditional not in my backyard, right? I mean, everybody wants things in theory, but they don’t want it to impact them. Are we? Should we expect? It’s hard to imagine that that things aren’t going to cost more. Are should we? Should we expect that we are in for a period of higher prices? Do you see this as inflationary? Well,
E.J. Antoni 22:59
it’s not inflationary, I would say, at least not in the academic sense. Where inflation is a monetary phenomenon, it causes the dollar to lose value, and so everything becomes more expensive, whereas this is going to cause the prices of specific things to go up, but it doesn’t actually impact the value of the dollar at all. Right, you’ll have one thing go up in price, but another thing won’t in fact, tariffs are, by definition, not inflationary. From the standpoint of the consumer has to spend more money on on object A, they have less money to spend on object B, so now the demand for B goes down, and therefore the price ends up dropping. So the overall price level actually, everything evens out. It stays the same. That’s not to say consumers are better off. They actually are slightly worse off. But let’s also remember what else is going on here. When we imposed all of these tariffs on steel, for example, under the first Trump administration, all these tariffs on Chinese steel, what happened? Well, only about 19 cents on the dollar of the tariffs were actually passed on to the American consumer. 81 cents were had to be eaten, essentially, by those Chinese producers. And the reason being is that if they raised their prices for the full dollar for dollar on these tariffs, then American consumers would just choose alternatives. They would choose domestic steel. They would choose other foreign steel, like what’s made in Sweden. That was a big source of competition at that time. It still is, because of all the iron ore and the infrastructure they have in place. But whatever the case Maggie, the fact is, these Chinese products are sourced. We source them from China specifically because they’re so cheap, and so if you put these big tariffs in place, all of a sudden they’re not cheap anymore, and there’s no incentive to buy them.
Maggie Lake 24:41
But are there alternatives? Because they’re tariffs against everyone by going after everyone at the same time, have we left ourselves with alternatives? Great,
E.J. Antoni 24:50
great question. It’s going to take time to reshore manufacturing. It’s not as if we can just instantly start making everything here overnight. Yeah, so a 90 day pause is great. It’s not enough to build a factory. Obviously. This was very much a shock treatment, right? This was not slowly getting things back to normal. This was a shock treatment. This was hitting the patient with radiation and chemotherapy and mass, and it’s causing a lot of negative side effects. It may ultimately kill the tumor, but again, lot of negative side effects. And this is why, going back to something we said earlier, the trade deals with key partners are so important during these 90 days, because you are going to need alternatives. And this is where India has a huge incentive to come to the table. They are, they are very much a rival in Asia with China, and so they are looking to replace China in terms of being a major manufacturing exporter, particularly to US markets that’s going to be a huge source of employment for them. It’s going to be a huge source of investment in their country, which they desperately, desperately need right now. So this does present, I think, just as many opportunities as it does problems. But look, you are going to have to feel some pain in the short term. We we’re basically going we’re basically changing the narrative from the exact opposite of what we’ve had Maggie for the last four years, where we just moved the economy from sugar high to sugar high. And every time the economy started to come down, we just gave it another hit, and the result was 40 year high inflation, the fastest rise in interest rates in 40 years, the fastest decline in the standard of living in 40 years, the fastest increase in the cost of living, again, in at least 40 years. And that is no way to run an economy. That is no way to run a country, but that’s what we’ve been doing, and in the same way that you know if you drank too much the night before, and in the morning you want to reach for the bottle again hair the dog, as they say, that’s a way to prevent yourself from feeling all the pain of sobering up. But it’s not a path to long term health. So what we’re going through right now, again, is a hard and fast detox. So it’s going to be painful, but it is the path to long run health.
Maggie Lake 27:03
So you are a fellow for unleashed prosperity, which looks at ways to try to make sure or ensure that the US is on a prosperous path. Is reassuring manufacturing is bringing manufacturing jobs back. One of the ways to do that is that what we should be doing? Oh, absolutely.
E.J. Antoni 27:22
But we have to remember that. And this is where it’s so important to look at tariffs in context. The primary cause of the hollowing out of our industrial base actually has nothing to do with international trade. And this is why it’s so important. If we look at not just the tariffs, okay, let me put it this way. Maggie, worst case scenario, tariffs are going to impose, let’s say, $450 billion in costs on the American consumer. Now that’s a lot, but that’s in the context of a tax package that’s going to provide about $4.5 trillion in relief to those American consumers. In other words, it’s 10 to one. Is the ratio we’re talking about here in terms of what the American consumer is getting versus what it’s going to cost them, and that’s before we even breathe a word about regulatory relief. Deregulation saved people much more money in the first Trump administration than the tax cut package did, and that’s saying something, and that was true for individuals just as much as it was true for businesses. So we’re looking at the exact same thing this go around where the deregulatory efforts of this administration are are, frankly, extreme. And I don’t mean that in a bad way. That’s not a pejorative. I mean that as a compliment. They are getting rid of burdensome regulation and at all levels of government, across all departments and agencies, that’s a good thing, that’s going to save us a lot of regulatory compliance costs. What’s really scary Maggie is that today in America, let’s say the typical manufacturing employee makes about 50 or $60,000 if you look at because there are just so many entry level employees. I understand people have been in the industry a lot longer and making more, but if you look at the regulatory compliance costs. It averages about 50 or $60,000 per worker in manufacturing. In other words, from the employers perspective, from the manufacturer’s perspective, an employee doesn’t cost them on average, $60,000 it costs them $120,000 because of all the regulatory costs associated with that employee every year, and that’s before we even start talking about a benefits package, which could easily be another 30 to $60,000 so again, we have done all of that to ourselves. We have created a tax code where we actually incentivize people to pick up a factory out of out of Texas, out of San Antonio, where they make a lot of a lot of cars. For example, Toyota makes the tundra and the Sequoia out of a factory there. There is an incentive to pick up that factory out of San Antonio, drop it Mexico, and then send the cars back into the US, right? I mean, that’s how crazy our tax code is, but we’ve actually provided an incentive for people to do that. So you got to fix the tax code all those, all those structural. Problems. You also need to lower rates. You need to deregulate. Those are things that have nothing to do with international trade. Yes, they have incentivized a move in terms of international trade where you’re going to pick up a factory, send it overseas, and then send the production back here into the US. But that doesn’t have anything to do with the structure of international trade, per se. And as evidence for that, Maggie, look at where the Rust Belt is, what we used to call The Industrial Belt. Now the Rust Belt, where is it? Is Blue State America. It’s Detroit, it’s Pittsburgh, it’s Cleveland, it’s Oh, heaven help us. It’s Chicago. It’s all of these areas that have been run by left wing Democrats, not even mainstream Democrats, but far left Democrats. You know, where are all of the factories being built today? Factories were getting built before this tariff fight even started. Where, in Tennessee, in Texas, in Florida, in Utah, these are the places. They’re also
Maggie Lake 30:55
lower population. There’s a lot of costs when you’re highly populated. They’re also lower population areas, but even, but
E.J. Antoni 31:00
even, if you want to look at areas that have a lot of population, like San Antonio, like Austin, you are seeing huge growth in what is, what are already major metropolitan centers, but these states have low marginal tax rates or no income tax at all. In the case of Texas, in the case of Tennessee, right? Florida is another one. But the other thing is they have low regulatory compliance costs, so you’re not dealing with the same kind of burdens that you are in again, some of the far left wing states here. And I don’t mean to get political, but this is just the reality. If you’re in a forced union labor state, your cost automatically go up, versus a right to work state. That’s just the reality. Those are the numbers. And so if you’re looking at building a factory, would you rather pay artificially high wages, or would you rather pay competitive market wages? I would rather pay the competitive market wage. But
Maggie Lake 31:53
it’s interesting, the union the union movement, was never stronger than when we had a robust Manu. It grew out of having a manufacturing base. So if we so, we’re saying, bring bring back manufacturing jobs, not union jobs, bring back manufacturing jobs and deregulate. So you’re confident the workers will get the kind of wages, living wages, that they would normally get, because those jobs are usually considered union jobs, right?
E.J. Antoni 32:21
But, but again, if, well, let’s, let’s, let’s give this some historical context, though, Maggie, if we look at when unions really achieved what was arguably the height of their power, it was when the manufacturing base was already strong in this country, and then it deteriorated from there, in large part because the unions sought out, sought to keep out, rather labor. In other words, keep the supply of labor down in order to keep wages artificially high. And that incentivized not hiring more Americans. It incentivized automation. It incentivized replacing artificially high labor costs with capital with machinery. It incentivized picking that factory up and sending it overseas, and that’s why, again, when you do see factories coming back to this country, they’re primarily coming back in order to employ non union folks. And what’s really crazy is that these unions aren’t even doing what’s best for most of their members. They tend to do what’s best for union leadership, but they also are usually protecting the worst of the workers. If think about it, if you’re already a very highly productive, efficient employee, you don’t need a union to represent you. In fact, you typically get higher wages when you leave the union and go to work somewhere else, because you are the creme de la creme. You’re the best of the best you have the highest productivity, you can command, the highest wage. You don’t need a union to represent you. You can represent yourself quite easily. I’m
Maggie Lake 33:48
sure, I’m sure the unions would have a different view on that. But do you, do you think if we bring back those manufacturing jobs that that young people will want to work in them? Do we have we do we have the skill set? Do we have the workers, especially now that you compete in a gig economy. Do you think that will actually result in that will be a benefit to the American worker? Because that’s what it’s been sold as, right? So, and then, who pays the price? Does it come at the expense of earnings for companies? How does that work?
E.J. Antoni 34:17
Great, great questions. I’ll try to take them in order, you know, in terms of, do we have the labor force? We do the problem is that we keep ruining it. In other words, a lot of these people are ready to take these jobs when they’re still in high school. They already have the skills that they need. You know, would they benefit from things like the return of shop class? And maybe we get rid of all these, these, these crazy classes that have nothing to do with any kind of productive work, and they’re not applicable to the real world. Yes, let’s, let’s get rid of that, and let’s go back to some actual, you know, on the job training, some some very, very tactile courses where people learn to work with their hands. They learn manufacturing skills. They learn. They learn, you know, how to be an electrician, how to be a plumber, how to be a carpenter, all of these things, those kinds of changes would would greatly benefit young people today and and really, I think, help prepare them for the return of all these different jobs. But, but again, even still, there are plenty of folks who are surprisingly Young, who are ready to take on these jobs. But instead, we have this culture where we’ve told young people, everyone has to go to college, even though college clearly isn’t for everybody. And there are a lot of people where all that results in is a quarter million dollars of student loan debt and not much in terms of applicable skills. I mean, why do I need to go get a four year degree in order to be an electrician when I could go to trade school and in literally, a matter of months get all of the information I need to be able to be a successful journeyman and eventually, you know, be a master electrician. It’s amazing, Maggie, how many of these folks eventually have their own small business, for example, after years on the job, this is the American dream, but when you have as crazy a tax code as we do, it incentivizes not small business, but big business. It makes it so that large corporations are the only ones that can compete. It’s increasingly hard to get off on your own. This was a big reason why in the 1990s the garage startup became a thing. It’s because the tax code incentivized it. Bill Clinton, the Democrat, worked with the Republicans in Congress to come up with massive reforms to the tax code that made the.com turned out to be a bubble, but the.com expansion possible. It did not have to be a bubble, to be clear, that was that was caused by actions of the Fed, but the expansion that we saw in terms of the first great growth of tech companies in the US that was made possible because of positive changes in the tax code, and it was a bipartisan effort to make that happen. Now in terms of who’s going to bear the cost of this, initially, it’s going to be a combination of foreign producers and American consumers, because these it’s what we call tax incidents in economics, just because someone actually writes a check doesn’t mean they’re the ones who bear the cost. This is famously illustrated with the corporate income tax. Who actually bears the burden of the corporate income tax. It’s not corporations, corporations, not a person. Yes, it’s a person de jure. It’s not a person de facto, who bears the cost of the corporate income tax. Shareholders do in the form of lower returns, customers do in the terms of higher prices, and workers do in the terms of slower wage growth. Those are the actual people who bear the cost, and it is a very real cost of the corporate income tax. So if you’re going to have a tax on international trade, it will function very similarly. So some of the tax is going to burden is going to fall on folks here at home, and some of it’s going to fall on folks overseas. But frankly, I actually think that’s kind of a good thing, that we are offshoring some of our tax burden, because when you think about it, there is an economic externality there that we want to get rid of, and it’s the fact that the United States Navy is protecting and patrolling the world’s sea lanes and keeping international trade safe. And I actually think it’s a good thing that foreigners help pay for some of that. It’s good to shift some of our tax burden off of our citizens and onto these companies overseas, because they’re getting the benefit that we’re providing VR military. If
Maggie Lake 38:25
we are you touched on this before, but I’m just going to simplify it. So if we are in an era where there’s a shift to workers, which I think a lot of people support, away from capital, do equity investors need to expect lower returns as we rebalance the economy? Or are you suggesting you can have equity returns and benefit the workers at the same time. Because when I talk to people, they it seems like a binary choice away from capital to workers.
E.J. Antoni 38:50
Well, it’s only a binary choice if we forget that those two things are complementary, right? You know, the whole and this is why it’s so ironic that people are spending all this money to get all these degrees, thinking that it’s going to help them in their career. It’s not if you want people to get higher wages, to be more productive, typically, the best way to do that isn’t investing in human capital. It’s investing in physical capital. Why? Because physical capital and human capital are complementary, and this is why the worker who’s on an assembly line, let’s say he’s putting a car together with hand tools. He is much less productive than the guy who’s doing it with power tools. Well, it wasn’t an investment in human capital that that put an impact driver, a pneumatic impact driver, in his hand, as opposed to a socket wrench. No, no. That was physical capital. That was an investment in physical capital that made that possible, and because he’s so much more productive on the line, he can command a higher wage than his counterpart who’s less productive. So
Maggie Lake 39:49
are we? Are we fighting a battle that’s that’s already moved on though? I mean, we have AI and robotics. Everyone can see these changes. I mean, surely. Exactly. That’s the direction that companies who are looking to satisfy shareholders are going to move in, not giving a guy a hand, a power tool. It just seems that this is moving but Maggie, that’s
E.J. Antoni 40:11
just an example. It applies equally well to AI. If you’re somebody, let’s say, who used to spend all day long writing newspaper columns, and you could only crank out two, maybe three a day, let’s say. But now you have AI, and you can use AI to write all these newspaper columns, and all you have to do is sit there and proofread it, maybe fact check it, make sure that the AI is actually putting out something that’s that’s an acceptable product. And now you can do 20 a day, you’re going to end up getting paid more. Why? Because your output is so much higher now overall, is that going to decrease employment? You know, industry wide, Sure, absolutely. And those folks will find jobs doing something else. When, when the when the automobile became mainstream, it absolutely destroyed the saddle industry in this country. It destroyed the carriage industry in this country, and those folks found jobs doing other stuff. A lot of them found jobs in the automotive industry, for example. So it’s not as if that’s going to create unemployment. It doesn’t creative destruction always ends up increasing the number of people who are employed, because we kind of fall into this trap Maggie of this Keynesian fallacy of aggregate demand. And I understand some people think it’s useful for certain types of analyzes, but the fact is, demand is infinite. I have unlimited wants, not limited. And so once I now am spending less money on a product because the production has gotten more efficient, I have more money left over, which means I’m going to buy more of other stuff, which means I’ve increased demand for other industries. So again, you always end up increasing employment, not decreasing employment, when you get these technological innovations and reassuring the industrial base here is not just about creating more jobs in manufacturing. You’re never going to get back to the heyday of the 1950s the post world war two era, when our manufacturing was massive and it was going like gangbusters. Why? Because a lot of the demand today isn’t even for physical stuff. It’s for services. A lot of the products we demand aren’t physical today. They’re technological. As you pointed out, it’s ones and zeros. It’s digital. So the idea that we need to reshore the manufacturing base is just as much about national security and having infrastructure here as it is about increasing the number of manufacturing jobs. Yeah,
Maggie Lake 42:31
that makes sense. So against this backdrop, because we could talk all day about the future of work, it’s a whole it’s a whole big topic, and it’s a fascinating one, and I know it’s on the minds of a lot of people, because we’re all thinking about not only ourselves but our children as they grow, but against the macro backdrop that you lay out, where there is the possibility of some really positive forces hitting the US economy, but also some short term pain, uncertainty, potential For price increases. Where does that leave the Federal Reserve they meet this week. Do you think they should be cutting interest rates, or is a wait and see approach prudent at this time, given all the uncertainty?
E.J. Antoni 43:10
Oh, goodness. I mean, it’d probably be the time to cut rates if they hadn’t already cut them last year, which was clearly premature. We saw that in terms of every month after they started cutting rates, the annual inflation rate kept going up and up, at least until January, and then we saw energy production really tick up and prices come down. And the most recent reading was flat. That was amazing. Both the CPI and the PCE price indices were actually flat for the month of March, zero increase. That was tremendous. But whatever the case, at this point, you know, the Fed shouldn’t even be setting rates. Let’s be honest. They should be following markets, not trying to lead them around by the nose, that the Fed should look at prevailing market rates and simply set the discount window to a rate, a penalty rate above that. In other words, let’s say the the prevailing market rate is is five or 6% for banks to lend from one another, the Fed should turn around and set a discount rate of eight or 9% so that they are not the lender of first resort, but last resort, and again, you pay a penalty rate for having to borrow from the central bank. They should. They need to seriously draw down the balance sheet. There’s supposed to be a clearing house, not a centralized and not, not a form of central planning. I should say, when it comes to the price level, they have the entire Federal Reserve. The entire Federal Reserve System has gotten way, way out of hand.
Maggie Lake 44:33
Do you see reforms coming? No,
E.J. Antoni 44:37
not, not anytime soon, unfortunately. And so investors are going to have to prepare themselves for that. You know, this is, this is a big reason why gold has just been on an absolute tear, and why it probably has a lot more upside, and why the market probably has more downside to it. We are getting just as much uncertainty and unpredictability out of the central bank as as from anywhere else. I mean, this look. Jerome Powell, he was constantly getting asked during the Biden administration, look the government spending, Mr. Chairman, trillions of dollars it doesn’t have, is this putting pressure on the central bank? Because obviously, the Fed either has to buy up those treasuries to prevent treasury yields from skyrocketing, pushing up interest rates outside of the Fed range, or the Fed needs to start moving rates to accommodate that one or the other. And clearly we saw that they went on a buying spree and exploded the balance sheet up to almost $9 trillion and then kept it artificially high. They were manipulating markets like the reverse repurchase agreements in order to try to keep a lid on inflation. We can go on and on, but the point here is what the Fed did was say, Look, we’re not going to acknowledge, essentially, the actions that we’re taking. We are not going to opine, we’re not going to say anything about fiscal policy. We’re just going to take those things as a given and react accordingly. But we don’t comment on what the President or Congress does, what a difference a president makes. Now that Trump is in office, they’re right back to, oh, well, all this stuff is inflationary. You know, we’re not even going to, it’s not even so much Maggie that we’re going to comment when asked a question, we’re going to preempt the question. I mean, we don’t even know what the Tariff Schedule is ultimately going to look like. And the Fed is already saying, Well, this is going to be inflationary. How? I mean, it’s just, it’s nonsense. These are the same people who, if consumer confidence went up one month or down another month, if inflation expectations went up one month or down another month, you know, they would move interest rates up or down, except they would do it in either case. In other words, inflation expectations zoomed higher, and they said, This is bad. We need to raise rates. Later on, inflation expectations zoomed higher right before the election, and the Fed said, No, we don’t need to raise rates. It’s not important. I mean, the it’s like the only data that they care about is whether the President has an R, A, D after their name. It’s terrible. And so again, markets don’t know where to look when it comes to the Fed, because the same data has been used by the Fed to put rates up or down, and so markets, just markets, have no idea which way this is going to go. The unpredictability here is through the roof.
Maggie Lake 47:10
You mentioned the fiscal side of things. On the fiscal side, there is a lot of concern about the deficits, the level of deficits, it’s a tough one. The US, regardless of the whether there’s an r and a D, never cuts back on spending, there’s been no political will to do anything close to that. You won’t get elected again if you do. But the bond market is indicating that they’ve reached a limit to how much they’re willing to go along with this. What are you expecting on the fiscal side, how important is it going to be as we move through these months? And you know, what kind of latitude does the administration have in Congress?
E.J. Antoni 47:49
It is massively, massively important, Maggie, that they get the spending down. And I understand there’s not much appetite for it, but as you pointed out, the bond vigilantes are going to force their hand one way or another, we’re going to get the spending cuts. It may come sooner. It may come later. It may be relatively painless. It may be incredibly painful, but it’s going to come at some point the Treasury is going to be unable to borrow money, and if at that point, the Fed steps in to make up the difference, that’s when things really, really fall apart. I mean, it’s just, it’s an incredibly tough situation. It didn’t have to be this way. But look, we are where we are. We need, not only the cuts in marginal tax rates to maximize revenue, we will probably need to see the top marginal rate down to about 20 or 25% to really maximize that revenue and grow the economy, grow the tax base, but then you’re also going to have to get the spending cuts in one way or another. The current levels, the current trajectories, are simply not sustainable. Do you see
Maggie Lake 48:51
an area where you can get those spending cuts? Because a lot of the headlines are always targeted toward things that don’t move the needle. We all know the big costs around entitlements, military spending, interest payments. I mean, it’s when you look at the rest of it. It’s a on a pie chart. It’s always a small piece. It makes a good headline, but it’s but you really, if you’re going to make a difference, you really need to to target things that have been the third rail of American politics. How can they do that? How can they cut spending if they can’t touch things like entitlements? Is there a way to thread that needle? I
E.J. Antoni 49:32
think so. And actually, I think Doge is really the answer there. And this is where I find it very, very telling which politicians, whether Democrats or Republicans, I find it very telling which politicians are up in arms about Doge saying, Oh, this is the end of the world. They want to take away your Social Security. Blah, blah, blah, all this, all this just absolute garbage. If you look at what they’re finding in programs like Social Security, it’s abuse, it’s corruption, it’s fraud, it’s waste. I mean. Who on earth is going to complain that they’ve found people who are 125 years old and are obviously fraudulent, fraudulently receiving benefits, or, I should say somebody else is fraudulently receiving those benefits. Right? What politician would not applaud that, because whether you like Social Security or not, let’s say you don’t like Social Security, you should still at least be glad that we’re cutting down federal expenditures, right? That makes sense. But let’s say you love Social Security. It’s the greatest thing since sliced bread. You should be very, very grateful that they are finding fraudulent payments and cutting them out of the budget, because that is prolonging the solvency of the Social Security Trust Fund, because you’re getting rid of illegitimate payments. Literally, everybody should love the fact that they’re doing this. And since you can clearly see there are plenty of politicians that don’t love it, they must not care about the things they tell you they care about, because it just doesn’t make any sense. So you do have plenty of room to cut Medicare, to cut Medicaid, to cut Social Security and not touch any legitimate beneficiaries payments. I mean, it’s absolutely astounding to think something like a third of all Medicaid payments are likely fraudulent, or at least are missed payments. I mean, this is, this is appalling, and this is one of the major expense lines in the government’s budget. That’s inexcusable. So I think Doge is again a key way to to cut back on this spending. Are things like these different entitlement programs, or things like social security and medicare eventually going to bankrupt us? Yes, they are, but that discussion is probably nine or 10 years down the road when they’re going to become a serious, serious threat for the for the time being, it’s the other elements of the budget, especially discretionary spending, that have been pushing us over. And to illustrate that, let’s say when Biden came into office, he did absolutely nothing. In other words, Biden comes into office, we don’t get an American rescue plan. We don’t get infrastructure, infrastructure bill, a chips act. We don’t get the info the IRA, we don’t get all these other multi trillion dollar pieces of legislation that the Biden administration helps push through Congress. We don’t get any of that. And some of those were bipartisan, by the way. Some of them obviously, were strictly party lines, only Democrats voted for them. But you know, there were republicans who voted for that stupid infrastructure bill too. Let’s say you don’t have any of that, and Biden simply allows the budget to return to 2019 levels. So all the one time, COVID emergency spending just let it expire. What would happen? We’d have a balanced budget today. That’s insane, but that’s where we’re at. So it was all of the discretionary spending that blew the roof off this, we’d have a much smaller debt. The cost to service the debt would be much lower, and again, the end result of that would be a budget that balances.
Maggie Lake 52:49
Can we get there without having a major liquidity event or a major breakdown in the treasury market system or the financial system?
E.J. Antoni 52:57
Oh, sure, absolutely now. Or would you have a recession, at least on paper, yeah, I think so. Look at the first GDP report. We saw. GDP, the for at a seasonally adjusted annualized rate, the quarterly change was down 310 of a percentage point. Well, what was the change in terms of government expenditures, government purchases? I should say it was down in terms of its impact on GDP, it was down a quarter of a percentage point. So that leaves only 0.5 and we can account for that probably just through missing components in imports that went into investment. In other words, the entirety of the negative report came from a reduction in government expenditures, and almost all of that can be attributed to the waste savings from Doge that they cut out of the of the first quarter spending. So you could very easily have a recession on paper because the government is spending less money. That was one of the reasons why, why the GDP report kept looking so good for the last four or five years, it was because they were spending so much money, and that gets counted as a positive in terms of its contribution to GDP. What’s the
Maggie Lake 54:03
greatest risk in your mind as we move through the next few months at this critical time with the trade negotiations,
E.J. Antoni 54:11
I think the spending is key. If we can’t get the spending down, Treasury, markets are going to stay roiled, and that means that you’re going to continue to have the United States negotiating from a position of weakness if you are, well, let me put it this way. As the Treasury Secretary likes to say, economic security is national security. If you are the economic powerhouse of the world. And I’m not saying we want autarky here, but if you have at least some level of self sufficiency, self reliance that puts you in an incredibly strong negotiating position. But if you’re running these massive deficits, if you have an out of control welfare state, if you have sovereign debt markets that are falling apart as a result of all of that, you’re negotiating from a position of weakness, and there’s a good chance that you’re not going to get those trade deals. On. But if we can get the tax package across the finish line, if we can push forward with more deregulation, if we can put federal finance on a sounder footing, that is a position of strength from which I would love to negotiate,
Maggie Lake 55:11
do you think the tariffs are a distraction away from those other issues that you feel can be positive? It’s
E.J. Antoni 55:17
a good question. I think that there definitely has been an over emphasis on the part of the media on the tariff discussion. Because, again, if you just look at the tax package, that’s literally 10 times the size of these tariffs, and that, by the way, is that for four, $50 billion that’s actually a worst case scenario that I think that the likelihood of the tax incidents falling mostly overseas and less so here at home. I think those odds are pretty good. So I think it will be less than a $450 billion negative impact on consumers. And again, you’re looking at a, excuse me, a tax cut package that is far, far bigger, and that’s before we even start talking about the cost savings from regulation. Well, to be fair, investors
Maggie Lake 56:01
have voted with their feet on in moments on tariffs and business. The business community is pretty vocal about their concerns around tariffs, so I don’t think it’s just the media focusing attention on it. I think that you know there are legitimate concerns, do you? Is there a risk that the Warren Buffett, at his annual Berkshire Hathaway meeting over the weekend, when he renounced, announced his retirement, said that trade can be an act of war, and he doesn’t think it should be used as a weapon. Do you worry that if we’re in a trade war, that it morphs into a capital war? We’ve already had reports that China has been reducing its purchases of treasuries has been perhaps for years. Japan just suggested that their treasury holdings could be part of the trade negotiations. Unclear whether that will really be the case, but the fact that even vocalized that is very interesting. Do you worry that it moves beyond just a trade war into something that escalates? I’m
E.J. Antoni 56:58
more so worried that people don’t seem to understand that we’ve been at war. We just haven’t been fighting it. This is, this is part of the the nonsense of these arguments where they say Trump is starting a trade war. No, he’s fighting the trade war that nobody accused FDR on December 8 of starting a war with Japan. But that’s the equivalent here. We have already been in a trade war. This is why I said earlier. This is this has been unilateral free trade. We have been in a trade war with all these different nations. We just haven’t been fighting back. They have been putting up barriers to trade, not us. They’re the ones who have been penalizing our exporters, not the other way around. And somehow, now that we finally have somebody who’s willing to fight back, who’s willing to go toe to toe with these countries, why is it all of a sudden now we’re starting a trade war? Trump’s starting a trade war. I don’t understand. I mean, that’s just, it’s nonsensical. But if you look at the folks who have benefited the most from this unilateral trade, in other words, the people who have been importing cheap stuff to sell to the American consumer. And again, I’m not saying cheap, cheap stuff as a pejorative, right? Some of this is quality products at a low price. That’s fine, but it’s relatively inexpensive. The folks who are helping to import that, they’re the ones who are up in arms, who are saying this is a trade war, because they might lose something here. And I get that nobody wants to lose anything, but why aren’t you fighting just as hard for American exporters? Oh, that’s right, because you don’t financially benefit from that. In fact, in a lot of ways, you benefit from the American exporter being kept down because now you’re handling all of the trade, right. So, I mean, look, the incentives determine the outcome. And you really have to look at, what are people incentivized to do? How are people making their money? That is a big portion of what’s behind the story that these different people are espousing. And look, I get that that Wall Street is is up in arms about this. I get that Wall Street is upset. But again, if Wall Street is so upset about something that’s going to have a relatively small impact, why are they not overjoyed at something like the tax package that’s going to have a relatively large impact? And I totally understand the tariffs are a lot nearer than the tax package, right? That’s probably further off on the calendar than the tariffs are. Totally understand that, but I can’t. I just can’t buy the narrative that Warren Buffett or the media or these different Chinese companies, whatever, are not having an impact on investor sentiment when they’re being told constantly this is going to be the end of the world, right? You mentioned, I think, was a business leader in the shipping industry, right? Talking about how this is going to be, this is going to be economic Armageddon, okay, if you’re an investor, Maggie, and you see that in a headline, you’re going to get spooked. Whether it’s true or not, it’s still going to, it is still very much going to, going to spook you, right? Wall Street Journal, back in 2022 they ran a headline about. How gold had law. I think this was September of 22 gold loses status as safe haven. Now. Meanwhile, gold has almost doubled since then. But after, after they ran that headline, what happened to gold markets? Well, they went down even further. I mean, Wall Street Journal actually just not to bash the journal, but they ran a story the other day, which they knew was false. This was malfeasance on their part. They knew it was false about Tesla having to look for a new CEO, because they contacted Tesla, and Tesla said, No, it’s not true, but they went and ran with the story anyway, it wiped out 10s of billions of dollars of Tesla share value because people started selling stock after that headline went up. So the media definitely affects what goes on in the market.
Maggie Lake 1:00:43
EJ, we have to leave it there. But thank you so much. This has been a fascinating conversation. We appreciate it. My pleasure. Maggie, thank
