Will the New Tariffs Tank the Economy?
In this episode of the Money Rehab podcast, tariffs take center stage as Nicole Lapin and James Altucher delve into the history, implications, and potential impacts of increased tariffs on the US economy. They explore how tariffs, once a primary source of federal revenue, have played a pivotal role throughout US history, with cautionary tales like the Smoot-Hawley Tariff illustrating the risks of stringent protectionist policies.
The episode examines the intricate effects of tariffs on inflation, the stock market, and overall economic growth. Altucher and Lapin also analyze how tariffs could reshape US manufacturing and job prospects, assessing whether potential job gains from relocating production could be mitigated by increased automation and AI adoption. Overall, the episode unpacks the complex ramifications of tariffs, shedding light on their potential strategic benefits and drawbacks.
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1-Page Summary
Tariff History and Precedents in the US
Tariffs Once Main Federal Revenue Source
Tariffs were the primary source of federal revenue from the founding of the US until 1913, accounting for 97% of revenues. As James Altucher notes, this period coincided with the industrial revolution and the US becoming an economic powerhouse.
Smoot-Hawley Tariff: A Cautionary Tale of Retaliation
The Smoot-Hawley Tariff of 1929 set astronomically high import duties up to 60%. Initially aimed at protecting American industries, these tariffs backfired, prompting retaliatory tariffs from other countries. This strained international trade and contributed to the Great Depression, demonstrating the wide-reaching consequences of stringent protectionist trade policies.
Tariffs' Impact on Inflation, Stocks, and Economy
Tariffs Not a Direct Cause of High Inflation
Altucher argues tariffs have not historically led to inflation, as prices adjust elsewhere in the economy to offset the impact. He contends overall inflation stems from excess money printing and supply chain issues, not tariffs.
Stock Market Drops as Tariffs Drive Investor Concern
Nicole Lapin highlights how the stock market experienced significant declines in response to new "Liberation Day tariffs," worrying about impacts on company profits and economic growth. Altucher notes major indices like the S&P 500 fell 5%.
Tariff Impact Unclear, But Possible Strategic Benefits
While uncertain about tariffs' effects, Altucher suggests potential benefits like leverage in trade negotiations, increased revenue, and moving manufacturing to the US. However, there are risks of recession, though likely not as severe as post-Smoot-Hawley.
Impact of Tariffs on US Manufacturing and Jobs
Tariffs May Move Manufacturing to US, Creating Jobs
Lapin and Altucher state tariffs incentivize companies to relocate manufacturing to the US, boosting American industry and creating jobs. Signs include major investments by Apple, Intel, and others to build US factories and avoid tariffs.
Automation May Limit Job Gains From Manufacturing Shifts
However, increased automation and robotics investment could offset anticipated manufacturing job growth. As Altucher notes, companies may turn to AI and robots over human workers to cut costs, potentially reducing job opportunities from manufacturing relocation.
1-Page Summary
Additional Materials
Counterarguments
- While tariffs were a significant source of revenue until 1913, it's important to consider that the US economy and tax system have evolved considerably since then, and what worked in the past may not be as effective or desirable in a modern, interconnected global economy.
- The correlation between the industrial revolution, the rise of the US as an economic powerhouse, and the use of tariffs does not necessarily imply causation; other factors such as technological advancements, natural resources, and labor force dynamics also played critical roles.
- Some economists argue that the Smoot-Hawley Tariff was not the primary cause of the Great Depression but rather exacerbated an already declining global economy, and that the depression's causes were multifaceted, including monetary policy mistakes and banking crises.
- The assertion that tariffs have not historically led to inflation could be challenged by pointing out instances where tariffs have contributed to higher costs for consumers and businesses, which can contribute to inflationary pressures in certain sectors or more broadly.
- The impact of tariffs on stock markets can be complex and multifaceted, and while they may cause short-term declines, other factors such as corporate earnings, economic indicators, and geopolitical events also significantly influence market movements.
- The strategic benefits of tariffs are debated among economists, with some arguing that the negative effects on consumers and certain industries can outweigh the potential benefits of increased revenue or leverage in trade negotiations.
- The potential for tariffs to cause a recession may vary depending on the economic context, the scale of the tariffs, and the response of trading partners, and some economists would argue that the risks could be more significant than suggested.
- The idea that tariffs will lead to a significant relocation of manufacturing to the US and job creation may be overly optimistic, as global supply chains are complex and companies consider many factors beyond tariffs when making location decisions.
- The trend of companies like Apple and Intel investing in US factories may not be solely or primarily due to tariffs; other factors such as technological innovation, workforce quality, and proximity to consumers also play a role.
- The impact of automation on job gains from manufacturing shifts is a critical consideration, and some would argue that the net effect on employment could be negative if automation displaces more jobs than are created through reshoring.
Actionables
- You can diversify your investment portfolio to mitigate risks associated with tariff-induced market volatility. By investing in a mix of domestic and international funds, bonds, and industries less likely to be affected by tariffs, you create a buffer against potential downturns in specific sectors. For example, consider adding renewable energy or healthcare-focused investments, as these may be less impacted by trade policies.
- Opt for products made in countries with stable trade relations to avoid potential cost increases from tariffs. When shopping, research the origin of products and prioritize those from countries that have strong, consistent trade agreements with your home country. This could mean choosing a smartphone from a country that hasn't been hit with high import duties, potentially saving you money if tariffs on other countries cause price hikes.
- Encourage your workplace to adopt automation-friendly practices to stay competitive in an evolving job market. Start by suggesting the implementation of simple software tools that streamline tasks, such as automated scheduling or inventory management systems. This proactive approach can help your company remain efficient and potentially create new tech-focused positions, even as the broader market shifts towards automation.
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Tariff History and Precedents in the US
The United States' use of tariffs has a long and significant history, which has had profound impacts on its economy and on international trade.
Tariffs Once Contributed 97% of Federal Revenues
Tariffs have played a crucial role in the funding of the federal government. In the years following the founding of the country up until 1913, tariffs on imported goods were the primary source of federal revenue, accounting for a staggering 97% of the United States' revenues. This period also coincided with the United States experiencing the industrial revolution and ascending to become one of the world's largest economies.
Tariffs Declined as Income Tax Became the Main Funding Source
The reliance on tariffs significantly declined once the federal income tax was instituted as the main funding source. This shift allowed revenue to be raised in a manner less reliant on trade dynamics and facilitated more complex economic policy development.
Smoot-Hawley Tariff: A Cautionary Tale of Retaliation and Depression
The most notable and historically significant use of tariffs in the United States is personified by the Smoot-Hawley Tariff. Passed by Congress in 1929, these tariffs set duty rates for imports at astronomically high levels, some rising to 60%.
Smoot-Hawley Tariffs Hit 60%, Straining Trade and International Ties
Implement ...
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Tariff History and Precedents in the US
Additional Materials
Counterarguments
- While tariffs contributed significantly to federal revenues, it's important to note that they also had protectionist purposes and could have negatively affected consumers and certain sectors of the economy by raising the prices of imported goods.
- The correlation between tariffs and the industrial revolution does not necessarily imply causation; other factors such as technological advancements, resource availability, and labor movements also played critical roles in the US economic growth.
- The transition to income tax as the main funding source may have had complex effects on the economy, including changes in incentives and potential impacts on income inequality.
- The assertion that the Smoot-Hawley Tariff contributed to the Great Depression is debated among economists; while it likely exacerbated the situation, the causes of the Great Depression are multifaceted and includ ...
Actionables
- You can analyze your personal spending to identify 'tariff-like' expenses and reduce them in favor of more growth-oriented investments. Just as the shift from tariffs to income tax represented a change in revenue sources for the government, you might find areas in your budget where you're spending money on things that don't contribute to your personal growth or financial goals. For example, if you're paying for a gym membership you rarely use, consider canceling it and investing that money into a course that could advance your career.
- Start a conversation with friends or family about the impact of buying local versus imported goods, using the Smoot-Hawley Tariff as a historical example of protectionism. This can lead to a personal experiment where for one month, you consciously purchase only local products to support your community and compare the experience and costs to your usual spending habits. You might discover that buying local not only helps local businesses but also reduces your carbon footprint due to less transportation.
- Create a simple board game that simulates trade policies and their consequences to better understand the c ...
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Tariffs' Impact on Inflation, Stocks, and Economy
James Altucher and Nicole Lapin explore how tariffs contribute to various economic factors, from consumer prices and stock market fluctuations to trade negotiations and overall economic health.
Tariffs Not Linked To High Inflation As Increases Offset Elsewhere
Altucher insists that historically tariffs have not led to inflation, presenting evidence from different periods, including before 2018, as well as the early United States, when tariffs were a primary federal revenue source with no inflation. He contends that overall inflation does not happen solely because of tariffs. Rather, prices adjust elsewhere in the economy, offsetting the impact of tariffs on certain goods. He associates overall inflation with the printing of excess money rather than tariffs, citing the hyperinflation in 1920s Germany and the U.S. printing 40% of its money during early pandemic bailouts.
"Inflation stems from money printing and supply chain issues, not tariffs," he states. Altucher points to the inflation rate of 9% in 2022 as a direct result of extensive money printing, whereas tariffs, according to him, have historically not contributed significantly to inflationary pressures.
Stock Market Drops as Major Indices Decline Due to New Tariffs
Nicole Lapin describes a significant downturn in the stock market in response to "Liberation Day tariffs," detailing that the market had its worst day since 2020. Altucher comments on major indices like the S&P 500 experiencing a notable 5% drop, which wiped out many of the gains from the previous four years. This negative sentiment is attributed to the worry about the impact of a potential trade war on company profits and economic growth. Furthermore, economists are weighing in on the possible repercussions of the new reciprocal tariffs.
"The stock market is clearly worried," Altucher observes, explaining that the declines reflect concerns over increased tariffs planned for goods from China, the EU, and Taiwan.
Tariffs' Impact Unclear: Possible Benefits for Local Manufacturing and Revenue, but High Risks of Recession
Altucher argues that while there is uncertainty related to "all the tariff stuff," it may not be the inflation trigger that some anticipate and could instead provide the U.S. wit ...
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Tariffs' Impact on Inflation, Stocks, and Economy
Additional Materials
Clarifications
- Tariffs can benefit local manufacturing by making imported goods relatively more expensive, encouraging consumers to buy domestically produced items. This can lead to increased demand for local products, boosting manufacturing activity and creating job opportunities. Additionally, tariffs can generate revenue for the government, which can be used to fund various programs and initiatives to support the economy. Overall, tariffs aim to protect domestic industries, promote self-sufficiency, and strengthen the country's economic base.
- Tariffs can provide leverage in trade negotiations by giving a country the ability to threaten or impose tariffs on imported goods from other nations. This leverage can be used as a bargaining tool to negotiate better trade terms, such as reducing tariffs on the country's exp ...
Counterarguments
- Tariffs can contribute to inflation by increasing the cost of imported goods, which can lead to higher prices for consumers and businesses.
- The impact of tariffs on inflation can be complex and may vary depending on the economic context and the specific industries affected.
- Stock market volatility in response to tariffs can also be influenced by other factors, such as monetary policy, geopolitical events, and market sentiment.
- While tariffs may provide leverage in trade negotiations, they can also lead to retaliation from other countries, potentially escalating into trade wars that harm global economic growth.
- The benefits of tariffs for local manufacturing must be weighed against the increased costs for industries that rely on imported materials and components.
- Tariffs may not always result in significant revenue gains if they lead to reduced trade volumes or if companies find ways to ...
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Impact of Tariffs on US Manufacturing and Jobs
Tariffs implemented on foreign goods have become a topic of discussion regarding their influence on the US manufacturing landscape and job market.
Tariffs Will Encourage Companies to Move Manufacturing To the US, Creating Jobs
Nicole Lapin and Altucher highlight that one of the anticipated effects of tariffs is to incentivize companies to relocate manufacturing back to the US. This relocation could potentially benefit the middle class and boost American industry by creating new jobs. Indeed, there are signs that this is happening, as seen by Apple's announcement of a $500 billion investment into US factories and Intel and Taiwan Semiconductor's plans to invest $200 billion in technology facilities within the US to avoid tariffs.
This investment is expected to aid the creation of jobs in the US, as evidenced by the estimated addition of 30,000 new auto worker jobs as a consequence of tariffs on cars from Asia.
Skilled Workers and Technology Pace Limit Rebuilding Domestic Manufacturing
However, despite the impetus to move manufacturing to the US, concerns arise over whether there is a sufficiently skilled workforce and whether the pace of technology can support the rebuilding of domestic manufacturing.
Automation, Robotics May Offset Job Gains From Tariffs
The presumed job creation from the migration of manufacturing due to tariffs may be countered by the increasing investment in automation and robotics.
Companies May Invest In Technology Over Hiring to Cut Costs and Improve Efficiency
With the threat of deportations and loss of workforces, companies may turn to robotics and AI to cut costs and increase efficiency. Robotics companies are enhancing their inv ...
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Impact of Tariffs on US Manufacturing and Jobs
Additional Materials
Clarifications
- Tariffs are taxes imposed on imported goods, affecting the cost of these products in the domestic market. They can impact US manufacturing by influencing companies' decisions on where to produce goods and how they manage their supply chains. The implementation of tariffs can lead to shifts in manufacturing locations, potentially affecting job creation and the overall competitiveness of the domestic manufacturing sector. Tariffs can also interact with other factors like technological advancements and automation, influencing the dynamics of job creation and workforce composition in the manufacturing industry.
- Tariffs can impact the US job market by potentially encouraging companies to relocate manufacturing back to the US, creating new job opportunities. However, concerns exist regarding the availability of skilled workers and the pace of technological advancements in supporting domestic manufacturing growth. Additionally, the job gains from manufacturing relocation due to tariffs could be offset by increased investments in automation and robotics, leading to potential shifts in the employment landscape within the manufacturing sector.
- Concerns about the availability of skilled workers for domestic manufacturing arise from the need for workers with specialized training and expertise to operate advanced machinery and technology in modern manufacturing processes. This issue highlights the importance of investing in education and training programs to upskill the workforce and meet the demands of evolving manufacturing industries. The pace of technological advancements in manufacturing may outstrip the rate at which workers can acquire new skills, leading to potential gaps in the labor market. Addressing this skills gap is crucial for ensuring the competitiveness and sustainability of domestic manufacturing in an increasingly technology-driven landscape.
- Investment in automation and robotics in response to tariffs is a strategy adopted by companies to cut costs and enhance efficiency. This involves utilizing technologies like robotics and AI to streamline manufacturing processes. The goal is to offset potential job gains fro ...
Counterarguments
- Tariffs may lead to higher production costs for companies, which can be passed on to consumers in the form of higher prices.
- The investment in US factories by companies like Apple, Intel, and Taiwan Semiconductor may not be solely due to tariffs but also other factors such as market access, supply chain control, and political pressures.
- The creation of 30,000 new auto worker jobs may not account for jobs lost in other sectors due to increased production costs and retaliatory tariffs from other countries.
- The availability of skilled workers is a significant challenge, and tariffs alone may not be sufficient to rebuild domestic manufacturing if the education and training systems do not keep pace.
- Automation and robotics could lead to greater productivity and economic growth, which may create new types of jobs that require different skills rather than simply eliminating jobs.
- Companies investing in technology over hiring may be responding to market demands for higher quali ...
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