Bulwark Takes - Trump’s Tariff Plan Is a Math Disaster

Episode Date: April 7, 2025

Trump's new tariff plan is built on a bogus formula—and it’s already crashing markets. Tim Miller and Stan Veuger break down the economic fallout, the fake math behind it, and why it’s more dangerous than it looks. Trump tariffs based on massive error, conservative think tank says https://www.axios.com/2025/04/06/trump-tariffs-error-aei The Trump White House Cited My Research to Justify Tariffs. They Got It All Wrong. https://www.nytimes.com/2025/04/07/opinion/trump-tariff-math-formula.html#

Hey guys, it's Tim Miller from The Bulwark. I'm here with my internet friend, senior fellow and economist at the American Enterprise Institute. It's Stan Voiger. How you doing, Stan? Hey, Tim. How's it going? You did a white paper that ruffled some feathers. That's not a phrase that you usually hear in Washington, D.C., but sometimes the white paper just has that much power. And essentially, the short of it, we'll get to explain it here in a second, is that the tariff formula that they put together was actually totally nonsensical and maybe written by people who didn't even take macroeconomics 101. So we'll explain the details of that to folks in a second. crashing again, just at the biggest possible picture, even if they had the math right, what do you make of the tariff regimes that these guys are putting into place from an economic perspective? Well, I think the tariff regime that they've put in place is very

bad. Reassuringly, people with money at stake in the stock markets appear to agree with me on that, as we have been in an ongoing crash since Wednesday. The way I think about the tariffs they've imposed, certainly there's a norm as most recent round, is that they are stagflationary. Not really so much inflationary, which is really what a lot of people are focused on, obviously, because of the experience we've had in the past few years, but stagflationary in the sense that, on the one hand, they push up prices just mechanically because you add tariffs to products you import. But at the same time, it's also a massive tax increase. It's super disruptive to supply chains. And so there's a dampening effect as well.

And so you have both of those things going on at the same time. It's not just an inflationary effect. It's also a reduction in economic activity going on at the same time. It's not just an inflationary effect. It's also sort of a reduction in economic activity that comes at the same time. Well, that seems pretty bad. A slowing economy and inflation. Yeah, and it's totally self-inflicted. You know, it's not, there's really no, it's because Trump has been obsessed with tariffs and I guess with the Japanese

since the 1980s. That's really, I think, the main rationale. That's how I think you should think about it. Yeah, the totally self-inflicted nature of this, I'll use the word stupid or moronic nature of this. Like it is, I mean, is there just kind of taking off the political hat and getting into an economic hat? Like, is there any argument for what they're doing? Like, anything that is sensible about the plan here? No. Well, so what you've seen is you've had a bunch of guys, certainly during the four years that Trump was out of office, you've had people come up with increasingly more convoluted rationalizations for the tariffs. Some of that, longstanding goals that people had themselves. Other stuff is just, you know,

we want to make it sound a little more respectable. So you have all this stuff about global macro imbalances and a Mar-a-Lago accord and an exchange rate. That to me just feels like backfilling of Trump's tariffs because the guys who, you know, hold those few points, they just, you know, just don't want to sound so stupid to just say, we think trade deficits are bad because we think we're losing money when we import stuff. You have some rationales that are a little closer to sort of traditional justifications to protectionism, like we want to protect America's manufacturing industry,

that's traditional sort of labor movement view on why you would want to protect America's manufacturing industry, right? That's traditional sort of labor movement view on why you would want to have tariffs. And you'll hear that from some people in the administration. You'll hear that from Peter Navarro, right? Who, not coincidentally, you know, ran for Congress as a Democrat repeatedly, right? That's sort of where those views were harbored in the 80s. You heard that from J.D. Vance. You know, first of all, none of that is going to happen. And secondly, it's an extremely expensive way to generate a few manufacturing jobs in the U.S.

Those manufacturing jobs also don't look like, I think, what they fantasize about. Because I think what they fantasize about is, like, strong guys with hammers in a steel mill. And that's not the kind of jobs that jobs that most manufacturing is like today, but also certainly not the kind of jobs that are going to come back in massive numbers. And so I think that justification, which is probably the most conventional one, is also very misguided. So it'll bring jobs back for like people in one of our archetypes, like skinny managers or nerdy, you know, out of shape people like that.

Yeah, with STEM degrees. Overseeing, you know, people that have expertise and, you know, kind of the economics of it, right? Like what kind of jobs would be coming? Well, it would be those kinds of things to the extent that will be successful. But I think even that is giving them too much credit because a lot of those industries rely on complicated international supply chains that are going to be very difficult to replicate. If you look at ASML, which is a sort of high-end

lithography companies, and they make machines that make semiconductors, they have suppliers all over the world. Most of the people who work there have advanced STEM training. That's what a lot of modern manufacturing looks like. And so it's just quite different. Then there are other industries where if we had a domestic industry, it would just be way smaller. Right now, we buy a lot of our clothes are produced in Southeast Asia. A lot of shoes are produced in Southeast Asia. I mean, we could produce those in the U.S., but they'd be like $50 expensive.

So we just end up having way fewer shoes, which is not great. So there's also just this big negative effect on our economic prosperity. So you're telling me the forgotten man doesn't often have advanced STEM degrees. That's something to think about. I just want to just because you mentioned it, I want to sit on the Mar-a-Lago Accord for one second and then I'm going to get to your paper. Because there is this kind of galaxy brain justification that is happening that's like Trump is some master manipulator. And their theory of the case, as I understand it, is basically

that they like want to crash the economy kind of because they want to get interest rates down so we can pay off our debt and refinance our debt maybe even. What is your sense for like what that rationale is? I think the way they would argue it is that they want an international accord to lower the value of the dollar so that our exporters are more competitive. Got it. And so I don't know how we get from-

We have to hurt the economy to hurt the dollar first. It's the usual galaxy brain thinking where the intermediate step is very unclear, right? It's crash the economy. And then the final step is also clear, which is where we have an international accord signed at Mar-a-Lago that makes our exports more competitive. But the intermediate steps are not totally obvious. Got it. OK. So your white paper, which was pretty funny, which I do just have to admit that I made a snarky comment about that was inaccurate on social media. So I just I want to give a mea culpa right now to you and Kevin off the top. But the gist of the paper is essentially that

if these guys are going to base their dumb tariffs on our trade deficit, they should have based it off of a totally different set of numbers than they based it off of. That's my layman's way to summarize it. Why don't you give people the details? Yeah, I think that's fair. So they, on Wednesday, they announced this set of tariffs, and it was not immediately clear how to calculate them, right? They had them for every country. And so, you know, people started trying to figure out, except Russia, except, yeah, that's right, except North Korea. I think there may be one or two more. They said that they couldn't put tariffs on Russia because we're negotiating, because Russia and Ukraine are negotiating. But of course, they did put tariffs on Ukraine.

Anyway, so people started trying to figure out what they do here. And pretty quickly, people started saying, look, what they did is they set a minimum of 10% on everyone. But if the trade deficit divided by imports that we get from a certain country is greater than 10 percent, if the trade deficit is greater than 10 percent of total trade flows with that country, then it's higher. And it's that number multiplied by two. If that's higher than 10 percent, then we get that. Anyway, that's what people came up with. Then the White House said, no, that's not true. We have a more complicated formula. So the Office of the U.S. Trade Representative put out this report where it was the formula

that people had been saying all along with two additional Greek letters in it that were multiplied. And they said, one of these Greek letters is four. The other one is 0.25. So if you multiply them out, you get one. So it's still the same formula, but they just added two more Greek letters to make it look more impressive.

Now, they claimed that they got this value, this 0.25. They claimed that they got it from a paper. This paper is by Alberto Cavallo and a couple of other people. You may have seen the Cavallo reference on the Internet. He was my office mate for a couple of years in graduate school. And in that paper, there is no such number. The estimate of the parameter that they're using in the formula in the paper is almost one. So it's four times bigger. So if you plug that number into the formula, all of their tariff calculations go down by a factor of four. And so at that point,

only very few countries would actually end up with a tariff over 10%. And no country would end up with more than 14%. So what is that number that would have brought it down? What is that based upon? It's the elasticity of import prices with respect to the tariff. So if you say the tariff goes up by one, how much do import prices go up? It's the pass-through elasticity, basically. And so that number is in the denominator. And so if you make it bigger, then your estimated tariffs go down. If you make it four times bigger, they go down by a lot.

And so we provide the, you know, we do the, it's obviously, you know, like that's a two-second calculation. That's like a third-grade calculation. I'm working on this as a kid right now. No offense. I don't want to undermine, you know, your credibility as a senior economist. But, yeah. Yeah, yeah, that's right. Yeah, exactly.

And so then you get rates that are way lower. The highest one is just below 14%. And very few countries are even below that 10% minimum, which is a completely arbitrary minimum, of course. Now, I think the White House, you know, by now realizes that they made a mistake. They have offered really no substantive defense. One of the other authors of the paper had an op-ed in the New York Times this morning confirming our argument, and, you know, Peter Navarro was on CNBC just now. He also had no no substantive pushback. And so I think they just messed up. Now, you know, there are two ways to respond to that. One is, oh, no, they applied the formula incorrectly, which is what a lot of more Trump friendly guys are saying.

They're trying to get Trump to say, well, you know, my my staffers, they messed up. Right. This is how I misinterpreted it originally. It was like, I thought that that was kind of like the point of this, right, which is there were some people who were trying to nudge Trump in the right direction, right, and so that is now happening. They're using your paper to be like, hey, Mr. President, maybe this actually should have been a little

lower here. You should fire the dummy that got the math wrong. That's right. Yeah. The way I, the way Kevin and I write about it is more, you know, this whole approach is nonsensical, but if we're going to take it seriously, you know, the numbers are wrong. And the other defense is just

you guys are cucks, neoconservative cucks, and don't know what you're talking about. Yeah, correct. A lack of loyalty. Which, you know, on a more serious note, I do think these are the kinds of mistakes that you end up making as an administration. If there's no culture of feedback, you know, there's no process. I think that's how these things happen.

Well, I mean, it's it's hard to give a rationale for why they would have messed up this simple math, like, you know, beyond, it was just a lack of seriousness in the process. And they don't, like you said, that there's no feedback from the administration. It's just a recklessness. And you see it in the signal chain in foreign policy, right? It's like, well, why weren't there any actual military experts on that signal chains? Like, put it, put aside the fact that I shouldn't have been on this private, on this public app, right? Like you, you're looking at the conversation happening and there's no like actual subject matter experts involved, right? And I assume it's a similar thing here. You see it in the people they sent to El Salvador. I'm sure they would have rather, you know, be in a situation where they're defending people with criminal records or in El Salvador than what they actually did. I think you see them every front. Yeah. That's a great point, Stan. All right. Any other funny economic anecdotes you've seen out of the lighthouse? We have to laugh at the, as all of our 401ks crash, we've got to find a little amusement in the process. Yeah. For me, the only silver lining is you have a set of guys

who have long understood that there's demand for people willing to defend Trump's economic policy ideas, who I think have had a rough week or in caste, those kinds of people. And so seeing them have to publicly embarrass themselves is, I guess, a silver lining in this situation. But it doesn't quite make up for the trillions of destroyed wealth and the millions of people are going to lose their jobs all over the world and the businesses that are going to

go under. Yeah, the shot in Florida of the bad people being wrong will not actually pay for the retirement home or the college fund. But it's not nothing. It's not nothing. All right nothing all right stan stan boker thank you so much man i appreciate you everybody should follow him on on your social media account of choice he's at aei everybody else subscribe to the feed i'll be back later today as always see you then peace