The Rundown - Why Tariffs Haven't Tanked the Economy (ft. Justin Wolfers)

Episode Date: December 21, 2025

Kyla Scanlon and Justin Wolfers, Professor of Public Policy and Economics at University of Michigan, join the show to break down the Federal Reserve’s latest rate cut—and why growing internal dissent at the Fed actually matters. We unpack what the dot plot reveals, how markets may be misreading Jerome Powell, and whether inflation data is being misunderstood rather than manipulated. The conversation also dives into tariffs, affordability, and why cost-driven inflation hits households differently than demand-driven price spikes.

Welcome back to the rundown, interview edition. Today, Kyla Scanlan joins to co-host an interview with Justin Wolfers, an economics professor at the University of Michigan. Now, just a heads up, we did record this interview about a week and a half ago, just a day after the Fed meeting. But I got to say this interview was unlike any interview that I've ever done. Let's just say that Justin has very strong feelings about the economy, the Fed, and the current administration. This conversation got pretty fiery and political at times, so buckle up. All right, let's get into it. The Fed, they just cut rates for the third time this year.

But there was dissent, right? We had one Fed official. He wanted to cut 50 basis points. That was Stephen Myran. And then two Fed officials didn't want to cut at all. So the question that I have is someone who's a casual Fed observer, why is this a big deal? Or is it a big deal that the Fed has become this fractured?

What's great is you have avoided the laziest form of economics journal. So the laziest form of economics journalism is you call someone and you say the Fed discuss, and everyone's got a view, right? Just like everyone's got a view about the weather, up, down, in, out. And there's no accountability. It's a moderately boring discussion. Inflation always worries you a bit. Unemployment always worries you a bit, blah, blah, blah.

I might be sounding like jaded today, but eventually you want to shoot yourself. So you asked the questions, Zaid, is something interesting happening? And the answer is yes, and you got to the interesting thing. It's not the dissents per se. That was three people who signed their names at the bottom saying, I disagree. It's actually the far deeper level of disagreement. So there were, you're right, two dissents to the upside, no change, one dissent to the downside. That's Stephen Moran.

Moran appears to be carrying water for the White House. That's basically uninteresting. He sold his soul, his intellect, his credibility and everything several months ago. but what you have is something called the dot plot. Wow, this sounds nerdy. So the dot plot is you say, where do I think interest rate should be at the end of 25, 26, 27 and so on. The nice thing about the December meeting

is when you say what do you think interest rate should be at the end of the year, you're effectively saying what should interest rates be today. So actually, therefore, you know that 12 people agreed think interest rates should be where they set them. Six think they should be higher and one should be lower. And in the state and boring world that Kyler and I inhabit, this is what's regarded as WrestleMania.

This is like throwing chairs and this is leaping off the top turnbuckle. There is a quarter point disagreement among six of the folks, which is important. This is a committee that historically has run on consensus. I think Powell wants to keep that consensus. And so what you saw at the previous meeting was he walked into the press conference conference and he basically screamed at markets, wake up, I don't have it under control the way you think I do. There's real division. So we don't really know what's next, which is, oh, tremendously exciting. I think it's interesting that you said Jerome Powell is warning the

markets because he also said something that I'd be curious to your feedback on. He essentially said that the White House is overstating the jobs numbers. What did you think about sort of that comment that he made, that growth actually might be negative? Right. And jobs. I want you to be very careful about the language that we use because they're very confusing information environment out there right now and there are people who want us to misunderstand it. Powell did not say the White House is overestimating growth. Powell said the official BLS statistics for employment growth, which are run according to an algorithm, a set of computer programs that have been written and set in stone months

that in many cases years prior may be currently overstating things. And there's a process for dealing with those overstatements. So look, here's the deep problem. Any number you ever see about the economy comes from a survey. We don't always ask everyone what's going on. And the problem is you need to make sure you know what is the survey population. How big is it? So if I know that 10% of the companies out there are employing more people, that's useful.

But I need to know how many companies there are. That's the fundamental problem. So that's called benchmarking. And we don't know because there are companies being born and dying every month. We have moderately good ways of estimating it. And that's what's currently coded into the BLS computer programs. And then every, I believe it's six months could be a year. There's better ways of measuring it.

And that's also coded into a different set of BLS computer programs, but those computer programs haven't been run and reported to the general public yet. but Powell employs boatloads of nerds who know what goes into those computer programs and sort of knows what's going to pop out of them. So the reason I wanted to slow down is to say two things, three things are true. The first thing is the statistics are not being manipulated. This is an honest process that's following the norms of the last 50 years and best statistical practice all around the world. Second thing is, you can be honest and not quite correct because you're following the rules. And the rules say this is how you're going to follow your process, but sometimes we can know a little something.

Third, this has nothing to do with the White House. So I am going to continue to believe official statistics. This is not a misinformation campaign. This is not a broken BLS. This is not a broken system. It's one of the leading and most important statistical systems in the world. It's really important to stand up for that because they're in a world in which there are people in politics who want us to stop believing in truth. We can have a truth orientation yet still understand any particular set of computer programs, has flaws at particular moments and can be improved.

That's what Powell's saying. He's probably right. The Fed has a long history of being more right on empirical measurement of the state of the economy than anyone else. Okay, sorry about that. It might have sounded like a rant. No, no, it's important because the media, like, you know, a lot of the headlines are framing it in a way that I think might sow more division than it creates unity. So it's good to have a clarification on it. And I think people are so quick to myself included, like latch on to anything involving a crisis of independence at the Federal Reserve interference at the Federal Reserve because of what's happening in 2026 with Trump nominating the Fed chair. Like, is that something that you worry about?

Deeply. I mean, let's just sort of go back. You and I just had a conversation, Kyla. I mean, you said six words and then I let loose with a rant. I'd call that a conversation. I am a very bad dinner party guest. Good podcast guest. Yeah, I know.

This is great. You're like, I get paid either way. No. We had a conversation. Our last exchange was the details of a BLS report are likely to be revised for extremely technical reasons. And we got very heated about it. And it's because we're in this world where people aren't telling the truth about what numbers that are be believed and what aren't. And it's because we're in a world which many, many public institutions are having their independence undermined.

in, you know, a BLS commission was fired for telling the truth, which if you worked under the BLS commission, you might sort of infer something about what the boss wants. We're in a world in which the Fed's independence may well be undermined, in which the president is literally talking to a potential future head of CNN telling them how they should run their news division. So all of that adds up to, if you're not a... a super nerd, it's unclear what you can believe anymore. And there are political forces for whom that's the end game.

Because a lot of stuff is made up. We're also in a world in which it's not long ago. My partner used to work in the White House. If the president said a number out loud, it would have been checked by a nerd and it would be true. And that was true for every year of my life until 2016. Now, it may be misrepresentative, it may be cherry-picked, it may be a whole lot of things, but it was true. That's no longer the case.

So it makes it a very difficult information environment for folks out there. And that's why folks like us who have some expertise play a role. So when the president says a number out loud, he no longer deserves the benefit of the doubt. Historically, they did. He's lied more often than he's told the truth. When the Bureau of Labor Statistics says something out loud, they deserve that presumption. Now you might be concerned that they might come under threat the way many other institutions have, but one thing I know for sure, I know a lot of those people.

Many of them trained at the University of Michigan. Some of them call me sometimes. And if things weren't right, I would know by the end of the afternoon. And I'll tell you something else. I've got no reason to keep it secret. Kyler, I promise I'm going to call you. You won't be the first to know. I'll call my partner first.

then my priest, maybe my therapist. But then I'm going to call you because then that's a five-alarm fire. But for now, there are truths coming out of the official statistical agencies, but not out of politicians' mouths. So I want to stick to that topic. So you're not worried about the manipulation of the data coming from the BLS. Some people are worried about that. I think obviously there's fair criticism around the survey.

It's old school who two answers phone calls anymore. Like why are we collecting data this way? There's valid criticism about that, which makes it harder for, you know, like people. It's also a lot of valid criticism about that. So a lot of the data. So the standard Republican talking point is we're getting numbers coming in by facts. You know why there's some guy out in Wyoming who insists on sending his number in by facts. But if that guy wanted to have his computer, talk to the BLS's computer, he would just have to say,

could you do this? Or in fact, he would have to stop, he would just have to stop saying, can I still use the facts? So a lot of the caricatures about what's going on are literally false and to the extent that they're true, the BLS, more than anyone on earth.

These are nerds who love numbers would love to fix them, but they're not being funded in a way that allows them to do so. Yeah. And funding's been cut further too. Yeah. So I think that's what makes it hard.

So obviously the people that work at the BLS, They take pride, they want to make sure they're producing the best data. They're not playing the politics game. I'm curious, though, why do you think Trump wants a rate cut so badly in the first place? Like, is it a housing thing? Because that's, I mean, even if, you know, the Fets cut rates all year, the 10 year hasn't really moved much. Mortgage rates haven't seen a meaningful drop. I mean, they've seen a little bit, but not meaningful.

Why do you think he wants a rate cut so bad? Okay. I have a new habit. I'm going to recommend it to you. I don't answer questions that are of the form. Why does Trump think? Why does Trump want? These are questions for his therapist. I'm an economist. Okay. Okay. Fair enough. I bet we can find a way around it. Like, why might a president believe this to be in his best interests? So, one, the man is a property developer. Property developers do well when interest rates are low. He may just have an instinct deep in his bones. Two, we understand the President's understanding of comparative advantage international trade and economics. It's not high. The idea that he has an absurd idiosyncratic view and holds it closely despite evidence theory and experts' views to the contrary, it's hardly unique to this domain. Third, we've seen other strong men have similar views. So I don't know why Erdogan wanted low rates in Turkey, but Erdogan wanted low

rates in Turkey. In fact, Erdogan believed low rates would solve inflation, which is ass backwards. But he's a strong man. And when you're a strong man and you say a dumb thing, no one tells you the opposite. Is Trump in a different information environment than Erdogan? I mean, who were the very serious economists around him who were saying, sir, you're understanding the economy is troubling. You don't think Kevin hasn't speaking up? You don't think he's speaking up at those meetings? Kevin's interviewing for a job.

Kevin and the truth, it's actually in family court right now. Kevin and the truth are getting a divorce. She walked out on him many years ago. He's been unfaithful to her. Okay, okay. Look, let me give you a different answer. This is the most sympathetic I can be.

I have long thought to myself, is there a theory of Trump economics? I don't know that there is, but I think if there were, it's this. Economists are very, very worried that when you run an economy hot, that it causes inflation and you can't run them too hot. There's a view that's traditionally been associated actually with the centre left, which has been, we're better off on average running the economy too hot. The instincts of neoclassical economics are to choke it off too early.

Just stoke the fire and let it rip. This would be a view if you want to use the language of economics that the economy's capacity to produce, that is potential output, is self-shaped by what we're doing. I actually sort of have some sympathy for that view. And so if there were a theory of Trumpian economics, it would be the constraints are never as bad as my advisors tell me. Let me test that theory out. He could be right. Remember, Trump won was actually not bad in the economy until COVID came along. This to the extent that he was running a theory, the theory was keep shoveling coal into the fire.

And the train kept going until, you know, it hit COVID. So do you think that he might be ready with that theory when it comes to tariffs, though? So look, here's the standard level of criticism. You guys, guys like me, economists, have been saying tariffs were a really bad idea. We've been talking about tariffs for ages. Why hasn't the economy fallen over? Zaid, tell me the date at which we got a stable tariff regime in the United States. We haven't gotten one, right?

Because it keeps changing. The rates keep changing. The policy keeps changing. Okay. If you're a business, do you try to respond to temporary transitory stuff or do you respond more to permanent changes? The latter. The permanent stuff. Right.

Okay. To the extent that there was a permanent change. So when did tariffs actually hit 16, 17, 18% in the United States? Was it April? That was when it was announced. I don't, some of the dates, that was when it was announced. Okay. So let's do some history.

Okay. So the bloke ran, announced a tariff schedule when he ran. He's elected in November. Of course, just because you said something on the campaign trail doesn't mean you'll actually do it. Arives, Doge just excavates the joint through January and February. And if you remember the financial press through February and March, it's all. like what's going on with tariffs. So then he decides in April he'll announce it.

He calls it Liberation Day. And if you remember, he announced high tariffs. They were going to go into effect very soon. But within seven days, the bond market freaked out. I mean, the bond market freaked out on Liberation Day. Within seven days, he reverses course, gives himself a 90-day vacation. Because why would you have figured out the details of your signature economic policy within the first 10 years of announcing that you were running for president,

gives himself 90 days, says there'll be 90 deals, there are zero. 90 days ends and he says, you know what? I didn't realize this 90 day pause would end. I still don't have anything. So he gave himself a 24-day extension. At the end of the 24-day extension announces a set of tariffs that are basically Liberation Day plus or minus a few percentage points so it doesn't look like nothing changed.

tries to implement them and the guys at the border say we can't program the computers that quickly. That brings us through to basically late August, early September. Guess what? We then had a government shutdown. So the last government data we have is around about September. Right. So we haven't had the Trump tariff regime implemented for any significant period of time. And even after he finalized it, he changed it. Remember, he discovered finally, it was very interesting.

I think Kevin Hassett had a lot to do with this. He discovered that we don't grow bananas in America. So he eliminated tariffs on bananas because he figured that that would not bring banana factories on shore. So these guys very, very smart. Within 10 months, they were able to figure that out. The tariffs on, you know, and then we've had a, we also, in the, the interim, by the way, had a trade war with China that began on Friday, a Friday in, I think it was October, May, been September, and was done by Monday.

Who knows what's going on? Yeah, that's, I mean, that's a valid point. But going back to what Jerome Powell seems to, I wouldn't say downplay the tariff impact, but he's not like freaking out about it, right? He's kind of like, well, I think it's a one-time impact. We'll have to see. So, look, here's actually something that's really important. One of the problems we've had is we've lost the ability to have a responsible conversation.

And so my job is to scream and say tariffs are going to destroy civilization. They're not. So the effect on the price level is a couple of percentage points, tops, right? So if that happens slowly over two years, the effect on the inflation rate will be a percentage point in each year. So the talking point, we shouldn't do tariffs because it'll blow inflation out of the water, a bad one. But if we're going to talk in these measured and sophisticated terms, we have to tell the whole story. Normally when we have inflation, prices rise and then wages rise to catch up. It's what happened during the pandemic. It's what happens almost always. With a monetary inflation, a demand

driven inflation, that's what happens. Why does that happen? Well, when the price of what you produce rises, that means the value of your production to your employer in dollar terms rose, And if your employer pays you according to your value, then the amount they can afford to pay you rises. And they won't do it because they like you. They'll do it because of competitive forces. With tariffs, it's a cost-driven inflation. That's different. Because now what happens is the prices are going up because the boss's costs went up.

The value of what you're produced to your boss has not gone up. The boss has no extra cash to pay you. So your wage will not catch up. So what that means is that the cost of the cost of. cost is persistent. It lasts forever. Your wages will never make up for this. So now let's come back and think about a one or two percentage point inflation. If it's driven by demand, let's say it's a two percentage point rise in the price. If it's driven by demand, it might take your wages a year to catch up. That means you're going to miss two percentage point years, right?

Right. So if you get paid $100,000, you'll lose $2,000. If it's two percentage points, but it lasts forever, now it's $2,000 this year. 2000 next year, 2000 the year after and so on. Let's discount this using a real interest rate of, what's your favorite real interest rate, Kyla? 3%. 3%. Okay, so therefore we multiply by 33. So now the cost of this is $66,000. So therefore the cost of a tariff-driven inflation, using Kyla's math, is 33 times larger than the cost of a Biden or demand-driven inflation.

that's the cost of tariffs, right? Okay. So the problem is in the financial press, we use this shortcut of saying, weren't that cause inflation? Correct. Yeah, it will. The real cost is what it does to our real incomes.

Now, let's try and translate everything we just said into more human terms. The cost is, toys are more expensive this year at Christmas. One of the truly great, now I'm going to say I'm not at all center left, one of the truly greatest forces raising the living standards of working-class Americans has been the availability of cheap toys from China.

For anyone who's listening, if your grandparents are still alive, ask your grandmother or grandfather how many toys they had when they grew up. For my grandmother, it was four, literally four, right? And they were made of wood, no beautiful. But she had four toys. My kids, actually, you said you have kids. I can't even tell you. It's probably 400, if I'm being honest.

Justin. And you're a work class guy as opposed to a podcasting elite, it might still be a hundred. Yeah. Right. And that's the beauty of trade. International trade did that because American carpentry, which is what made my grandmother's toys, didn't get cheaper. It's trade with China that did that. And of course, industrialization, manufacturing, blah, blah, blah, blah, blah, blah, a whole lot of

stuff. But that's the very human thing, which is at a human level, trade is what means my kids have cheap toys. It's what means that even families on low incomes can afford to eat. It's what makes prepackaged food so affordable. It's what means food is never out of season. It's about the, it's those things. And those things are what tariffs impede. That's well said. And I appreciate you kind of walking through the difference between demand side inflation. versus the tariff inflation. That was, you know, we did some math there, but even if you kind of take the math out,

you do kind of, you bring the point across. Kyla, I'm going to turn it over to you. I've been talking a lot. I'm going to turn it over to you, Kyla, to ask a few questions because I've been talking a lot. Yeah. Yeah, I mean, I think, like, you know, when most people are thinking about the economy right now,

like there's a lot of words that we can use to talk about it. Like, affordability is one of the main ones that keep on popping up, you know, I'm Donnie in New York City. One, on that messaging, Trump has called it a hoax, but he's also on an affordability tour. And so I think when you think about the policies that can help address some of these aspects of affordability, so if we think about like housing, healthcare, education, what sort of policy

solutions can we put forward or sort of think through probably at the state and local level at this point to address some of the economic anxiety that Americans are feeling. Actually, I think there's a great affordability agenda for Trump, which there wasn't for Biden. Why? Because Trump did a lot to screw it up. Okay, let's just literally go through the list. Tariffs. Tariffs that are a near-century high. Tariffs flow through at the moment. We know for sure and for certain that tariffs are not being paid by foreigners. We know that because we know what's going on with the import price index. Whether they're being born by American businesses or American consumers is a different question, but they're being born by Americans. Next, mass deportations. Mass deportations making construction more expensive and more difficult. They're making agriculture more expensive and more difficult. Anytime you try and just upend an economy, you make everyone's life harder, you create

supply chain difficulties. I think that's a story we haven't heard enough about yet. I think moving from a world of ongoing population growth to trying to stop it overnight is going to cause problems that we haven't figured out yet. Next, the Trump budget. the largest redistribution from poor to rich in American history in a single bill. Why am I struggling with affordability? Because the government's taking more out of my paycheck and giving it to those other pricks.

So that's a huge part of affordability. Next, the Obamacare subsidies are about to expire. Republicans have done nothing about it. If they don't do anything about it, that means health insurance costs might rise, I think, 114% for some people. Yes. There's a huge, huge expense for families that are struggling. to make ends meet, and they're frankly terrified right now.

More broadly, the Republican health care plan, as they last heard it, was send everyone a $2,000 check and assume that there is a market for health insurance where you can buy something for $2,000. Well, I guess it's a lot cheaper, but it sure as heck isn't health insurance. So that's going to put all of us at the mercy of one bad disease, one broken leg, one car accident, and it's over. Next, undermining the Fed. Undermining the Fed raises long-term real interest rates as it raises risk premium.

It raises inflation expectations. It makes it hard to borrow because everyone's worried that the debt will get inflated away halfway through my 30-year mortgage. Next, we are running enormous deficits, huge deficits for this stage in the business cycle. So if you run deficits, the government's doing all the borrowing, which means there's less cash for the rest of us. and the only way we can borrow more money is by paying higher interest rates. So mortgage rates are being boosted by enormous fiscal deficits.

Next, cuts to snap, which certainly came up during the shutdown. I'm not sure where they're at right now. Next, cutting renewable energy subsidies. There's nothing you're doing on energy that's helpful if what you're doing is like shutting down windmills for no reason. So, yes, I have a radical affordability agenda for the Trump administration. Stop doing dumb shit. That's it. I think you get a long way on that.

Now, you wanted to push further. You said, you know, the state and local stuff. And like housing, can we figure out a way to build more housing? I would love it. I don't know how to do it, but we should. Yeah, well, I think a lot of people feel that way. So that's a good thing, as a lot of people are aware. Oh, they all want housing built somewhere else.

Yes, not around the... There are many other neighborhoods we want building in. Yes. but not in my backyard, which is not great. So I appreciate you guys again. What we'll end it there and whatever questions we have. There's some AI stuff we wanted to get into, but we'll save that for the next time, you know. Well, all right, guys, hope you enjoyed that conversation with Justin Wolfers.

Let us know in the comments on Spotify or YouTube on what you thought. Now, I'm really looking forward to the comments on this one. Also, shout out to Kyla for co-hosting. By the way, she recently wrote a fantastic piece on her substack about the economy, happiness, the rise of gambling, a ton of stuff. It's a long piece, but I highly recommend you guys checking it out. And of course, follow her on Instagram to get daily commentary on macroeconomics and a ton of other stuff. Thank you guys again for listening, watching, and commenting.

Shout out to Mike and Connor for all the work behind the scenes. And we'll see you guys back here tomorrow.