Why You're Getting Poorer: Major Slowdown Ahead | Donald Boudreaux

Trade deficits are not an emergency and are actually a blessing for America because they represent an inflow of capital into the country, not a loss.

“Trade deficits are misunderstood by most people. Trade deficits are an inflow of capital into the country. This is not an emergency. It it's it's a blessing in my view for America.”

This trend of declining manufacturing workforce share has not accelerated when the US began running trade deficits, when NAFTA was implemented in 1994, or when China joined the WTO in 2001; if anything, the decline has slowed over the past 15 years.

“It hasn't accelerated when the United States began to run trade s deficits. It hasn't accelerated when NAFTA was implemented in 1994. It didn't accelerate when China joined the WTO in 2001. Indeed, if anything, for the past 15 years, the rate at which uh manufacturing workers as a share of the total workforce has fallen has slowed a bit.”

Governments fear financial crises because they dramatically reduce the re-election prospects of the sitting officials, so their incentive is to solve problems now by throwing cash at them, which makes near-term conditions better but creates worse long-term incentives.

“The the governments of course fear financial [34:49] crisis because the financial crisis make life really really difficult for the person that's currently in office. It really dramatically reduces their prospects of re-election. And so their incentive is to solve the problem now. Throw cash at the problem now and then we'll deal with the long run consequences later. The problem is when you throw cash at the problem now, you might make things appear to be better now, but then you make things in the future worse because you're creating even worse incentives.”

If Trump forces Apple to manufacture iPhones in the U.S. via tariffs, the products will become more expensive, Americans will replace them less frequently, quality may fall, and resources moved into U.S.-based factories will have to come from other U.S. industries, causing output and prices to rise elsewhere in the economy, resulting in lower American living standards.

“the products that those companies sell in America are going to go up in price and so Americans will be able to afford fewer of them. We'll replace our iPhones much less frequently than we currently do.”

Trade deficits are not an emergency and are actually a blessing for America because they represent an inflow of capital into the country, not a loss of economic capacity.

“Trade deficits are misunderstood by most people. Trade deficits are an inflow of capital into the country. This is not an emergency. It it's it's a blessing in my view for America.”

The share of the U.S. workforce in manufacturing has declined steadily since 1954 from approximately 30% to 8%, but this decline is caused by mechanization and innovation, not by trade with China or other countries, and the rate of decline has slowed over the past 15 years rather than accelerating despite NAFTA and China joining the WTO.

“the share of the workforce in manufacturing as a as a share of the total workforce has been [10:26] falling but that's been falling since 1954 pretty steadily in 1954 it was a close to 30% I believe today it's about 8% but if you look at that that trend that trend from perspective of your viewers that trend has been steadily downward and it hasn't accelerated when the United States began to run trade s deficits. It hasn't accelerated when NAFTA was implemented in 1994. It didn't accelerate when China joined the WTO in 2001. Indeed, if anything, for the past [10:57] 15 years, the rate at which uh manufacturing workers as a share of the total workforce has fallen has slowed a bit.”

The greatest risk from closing the global economy is not declining living standards but hot shooting wars, as history shows, so the rise of economic nationalism is dangerous.

“when the global economy closes The great risk, the greatest risk is not so much that our living standards decline. The great risk is that hot shooting wars break out. We have a long history of this.”

Friedrich Hayek helped found the Mont Pelerin Society in 1947 as an organization of liberal scholars who agreed that the global economy should be kept open, though they disagreed on other matters.

“I would explain you know Hayek was a great liberal in the classic sense of the of the term and in 1947 he helped found the Montpellerin society which is an organization of liberal liberal scholars they didn't agree on everything but they certainly [44:37] agreed that the global economy should be kept open”

A rich society can afford the consumption good of studying impractical subjects (e.g., 17th century French sonnets), but students should understand such majors are consumption goods, not credentials for employment.

“when you're really rich, you can major in, you know, in a rich society, you can major in something that has few job prospects. I, I don't know, major in, you know, 17th century French sonnets. Well, okay, that's fine. But understand that that's a consumption good for you. yet no one's going to employ you to pontificate about 17th century French sonnets.”

America is a gigantic, largely free economy, so investors have been willing to hold US debt at low interest rates, but if debt becomes too large, global investors will become concerned about US repayment capacity, causing interest rates to spike and making it difficult for private businesses to borrow.

“Americans have been lucky because we are a gigantic economy. It's still largely a free economy and so people have been willing to hold our our debt at largely low interest rates. Uh but if the debt becomes too large and if global investors become spooked by saying wait a minute the US government might not repay or or they might delay they might delay repayments.”

Economic nationalism has been rising in the past 10 years, and this is dangerous because open global economies prevent hot shooting wars; when the global economy closes, the greatest risk is not that living standards decline but that hot shooting wars break out.

“really in the last 10 years, economic nationalism has been on the rise. And I guess my guess is he and I would agree greatly on the undesirability, the danger of this rise of economic nationalism.”

The Mont Pelerin Society was founded by Hayek in 1947 as an organization of liberal scholars who agreed that the global economy should be kept open, believing that open global economies are essential for peace.

“Hayek was a great liberal in the classic sense of the of the term and in 1947 he helped found the Montpellerin society which is an organization of liberal liberal scholars they didn't agree on everything but they certainly agreed that the global economy should be kept open uh because when the global economy closes The great risk, the greatest risk is not so much that our living standards decline. The great risk is that hot shooting wars break out.”

Tariffs will unambiguously make Americans poorer and cause the US economy to grow more slowly than it would without tariffs, because resources diverted to higher-cost domestic production must come from somewhere else in the economy, causing prices to rise and living standards to fall.

“The tariffs will unambiguously make us Americans poorer and our economy grow more slowly than they the we would experience in the absence of those tariffs.”

Federal budget deficits will eventually burden future American taxpayers through higher explicit taxes, reduced government services, or monetization by the Federal Reserve printing money, and as the deficit rises, the risk of Fed monetization increases, creating inflation.

“the debt has to be repaid and so the people who will repay that debt are future taxpayers when the debt comes due and when the debt service comes due. That's unavoidable. And Americans in the future will repay that debt either by paying higher explicit taxes in the future uh by having fewer government services delivered to them in the future or much more worrisome having the debt monetized having the Federal Reserve come in printing money”

If debt becomes too large and global investors become spooked about US repayment capacity or delays, interest rates will spike, making it increasingly difficult for both government and private businesses to borrow, causing business activity to compress dramatically.

“if the debt becomes too large and if global investors become spooked by saying wait a minute the US government might not repay or or they might delay they might delay repayments. Uh then those interest rates will spike. uh as those interest rates spike then the United States government finds it then increasingly difficult to borrow money more worrisome is that private Americans particularly private American businesses will find it more worrisome to borrow money um so uh and when that happens business uh activity will compress dramatically”

The 2008 financial crisis was caused partly by government housing policies, not just deregulation; beginning in the early 1990s, the government decided to increase homeownership for families who would not have been eligible for mortgages, and required Fannie Mae and Freddy Mac to steadily increase subprime mortgage purchases.

“starting in the early 1990s and accelerating through the 1990s, um the the US government decided that uh it increasing the homeownership of families who in the past would not have been eligible for mortgages is a good thing.”

Banks generating subprime mortgages were eager to extend mortgages to borrowers without 20% down payments or qualifying credit because Fannie Mae and Freddy Mac, backed by government, were willing to buy these mortgages, eliminating the bank's risk and making the banks willing to lower lending standards.

“If Fanny and Freddy are buying these things, of course, the mortgage generators, the banks generating these things, they're they're eager to to to make the mortgages. Okay, I got this big gigantic agency or agencies, Fanny and Freddy, willing to buy these mortgages. So, I'm the local bank. I'm happy to extend the mortgage to this person who didn't put 20% down, put nothing down or only 5% down, didn't doesn't have the economic qualifications that the mortgage borrowers in the past would have had to have. But I don't care. I'm I'm going to make this loan to this mortgage uh holder and I'm going to sell the mortgage to Fanny and Freddy and I'll I'll be made whole for it.”

The Great Depression was caused by the Federal Reserve's failure to act as lender of last resort, allowing the money supply to contract by 30% from 1930-1933 (the 'Great Contraction'), not by fundamental flaws of capitalism like greed or speculation.

“It was caused first by a failure of the Federal Reserve to do its job. The Federal Reserve was created in 1913 to serve as a lender of last resort when cash reserves and banks went low. And the Federal Reserve in 1929 failed to do that. They allowed the money supply in the US to contract by 30% from 1930 through 1933. Milton Freeman and Adam Schwarz called that the great contraction.”

Companies like Apple already have sufficient incentive to become more efficient without government orders or tariffs; if government needs to force efficiency improvements, it suggests those improvements wouldn't be economically viable.

“But but surely these companies have an incentive to do that already. And if they manage to do and so that we don't need we don't need a US president or uh the US government giving companies the incentive to become more efficient. They already have that incentive.”

The United States has been running trade deficits continuously since the speaker's senior year of high school approximately 47 years ago, making them a normal feature of the economy, not a recent emergency.

“the United States has been running trade deficits since literally my senior year of high school. And two years ago, I turned 65. The original, you know, the official retirement date. My entire adult lifetime. The US has been running annual trade deficits.”

Students should not feel they need to attend college just because their cousins attend, and should pursue callings in blue-collar trades like HVAC, auto repair, or construction if that is their inclination.

“Don't feel you need to go to college just because your cousins go to college. If your calling is to be an HVAC technician or or an auto mechanic or, you know, work in a construction trade, then do it.”

The United States has been lucky because it is a gigantic economy that is still largely free, so people have been willing to hold US debt at largely low interest rates, unlike countries that face higher debt service costs.

“Americans have been lucky because we are a gigantic economy. It's still largely a free economy and so people have been willing to hold our our debt at largely low interest rates.”

The government fears financial crises because they make life difficult for the incumbent officeholder and dramatically reduce their re-election prospects, so their incentive is to solve crises immediately by throwing cash at them rather than addressing long-run structural problems.

“The the governments of course fear financial crisis because the financial crisis make life really really difficult for the person that's currently in office. It really dramatically reduces their prospects of re-election. And so their incentive is to solve the problem now. Throw cash at the problem now and then we'll deal with the long run consequences later.”

Future taxpayers will bear the burden of the current $2.5 trillion budget deficit either through higher explicit taxes, fewer government services, or monetary expansion that creates inflation; there is no way around this burden except through default, which would harm debt holders.

“Yes, the debt has to be repaid and so the people who will repay that debt are future taxpayers when the debt comes due and when the debt service comes due. That's unavoidable. And Americans in the future will repay that debt either by paying higher explicit taxes in the future uh by having fewer government services delivered to them in the future or much more worrisome having the debt monetized having the Federal [23:54] Reserve come in printing money in order to to uh help the government pay the debt.”

Companies like Apple already have strong incentives to become more efficient and innovate in their manufacturing processes, so the government does not need to force them to do so through tariffs or mandates; any efficiency gains forced by government action would be less efficient than market-driven solutions.

“But but surely these companies have an incentive to do that already. And if they manage to do and so that we don't need we don't need a US president or uh the US government giving companies the incentive to become more efficient. They already have that incentive. The the if if if to the extent that manufacturing is reshorted as we say in [15:36] America because of the tariffs that production will unquestionably be less efficient than it currently is.”

The relationship between taxes and economic growth is that more taxation results in less of the taxed activity, and broad-based low marginal rate taxes are the best way for government to raise revenue, while high discretionary rates targeting particular activities amount to economic engineering that picks winners and losers.

“uh well taxes are pretty simple. The more you tax some yeah this is a debate between you know the left and the right [21:19] yeah you get you get less of it. Now the is an empirical question. How much of it do you get less of?”

As federal debt rises to a certain level as a proportion of GDP, countries begin to suffer economically, and there is no evidence that the United States is immune to this pattern.

“at some point the debt can grow too high. There's evidence cross-country evidence that as debt rises to a certain level [24:58] proportion to GDP those countries begin to suffer. I see no reason to believe that the the United States is immune to that.”

Universities that receive government funding must accept constraints on how that funding is used, so the Trump administration can legally place conditions on Harvard's federal funding, though Bauer disagrees with the current policy being applied.

“if you [40:27] are taking money from the government, uh, then as a university, then you have to be willing to accept whatever constraints the government uh uh uh imposes on your accepting money. Harvard gets a lot of money from the US government. I personally may disagree with some of the new constraints that the Trump administration is putting on that money, but it's hard for me to say, well, if the government is giving the money, then the recipient of the money uh has no excuse me, the giver of the money, the federal government has no right to determine or put put limits on [41:00] how that money is used.”

Economic nationalism has been on the rise over the past 10 years, reversing the post-WWII trend toward global economic openness that Hayek would have supported.

“really in the [45:07] last 10 years, economic nationalism has been on the rise. And I guess my guess is he and I would agree greatly on the undesirability, the danger of this rise of economic nationalism.”

The decline in manufacturing employment as a share of total US workforce (from ~30% in 1954 to ~8% today) is not caused by trade but by mechanization and technological innovation; approximately 80% of this decline is due to innovation and only 20% can be directly related to trade.

“it's caused by mechanization it's caused by the very same forces that worldwide and in North America caused the portion of the workforce in agriculture to decline you know 200 years ago you had about 80% of the workforce in the United States working on farms. Today you have about 1%. And that had nothing to do with trade very much. It had mostly to do almost exclusively to do with the mechanization of farms”

It is impossible to continue running up debt without assets backing it without expecting negative consequences in the future; no one can predict exactly when such a crisis would happen, but continuation of unconstrained deficit spending is unsustainable.

“at some point you cannot you cannot continue to run up debt without assets behind it uh to support it without expecting some negative consequences in the future. When when they will be I I I don't know. But I do know that it's impossible to continue down this road unconstrained as we're doing.”

Trump has unquestionably exceeded the statutory conditions under which Congress delegated tariff authority to the executive branch, particularly with the April 2nd 'Liberation Day' tariffs, which were implemented under a 1977 statute that requires a presidential declaration of emergency, and trade deficits do not constitute an emergency.

“Trump, in my view, has unquestionably exceeded those conditions. He's unquestionably made a mockery of the delegation of power.”

Peacetime threats by a sitting US president to a private company doing nothing wrong to force manufacturing reshoring are unprecedented, though governments have used tariffs and carrots-and-sticks during wartime.

“not many. I mean, governments, the US government for many times in the past, of course, has raised tariffs in the hope of generating more output for the protected industries. Uh during wartime, of course, World War II, the Korean War, presidents have have tried to bully uh uh companies into doing this and that uh or you using carrots and sticks. This peacetime uh order, seemingly an order, peace time threat by a sitting US president to a private company that's doing nothing wrong. uh is uh yes that's a bit unprecedented.”

The Great Depression was not caused by a fundamental flaw of capitalism (greed, speculation, underconsumption) but by two things: the Federal Reserve's failure to do its job as lender of last resort and allow the money supply to contract by 30% from 1930-1933, and the Smoot-Hawley tariff which contracted trade.

“The Great Depression wasn't caused by a failure of capitalism. It was caused by two things. To summarize, it was caused first by a failure of the Federal Reserve to do its job. The Federal Reserve was created in 1913 to serve as a lender of last resort when cash reserves and banks went low. And the Federal Reserve in 1929 failed to do that. They allowed the money [19:14] supply in the US to contract by 30% from 1930 through 1933. Milton Freeman and Adam Schwarz called that the great contraction.”

The 2008 financial crisis resulted partly from government housing policies starting in the early 1990s that pressured Fannie Mae and Freddie Mac to buy increasingly higher percentages of subprime mortgages, incentivizing banks to extend mortgages to unqualified borrowers who would later default.

“starting in the early 1990s and accelerating through the 1990s, um the the US government decided that uh it increasing the homeownership of families who in the past would not have been eligible for mortgages is a good thing. You looked at okay, people who own homes, they're they're more financially stable. Uh uh which is a good thing and that's true. And so through various [30:13] mechanisms um the not least being the government's influence over Fanny May and Freddy Mack nominally private institutions but they were created by the government to buy uh mortgage back securities and buy mortgages. the government increasingly required that the percentage of of um I forget the exact term. Well, basically subprime mortgages that these [30:43] institutions hold steadily increase.”

It is unprecedented for a sitting U.S. president in peacetime to threaten a private company that is doing nothing wrong with tariffs to force it to manufacture domestically.

“This peacetime uh order, seemingly an order, peace time threat by a sitting US president to a private company that's doing nothing wrong. uh is uh yes that's a bit unprecedented.”

The New Deal did not contribute much to recovery from the Great Depression and probably extended it by creating uncertainty, and the Depression did not truly end until after World War II when private investment and business confidence returned.

“his policies some of them did some good in terms of relief. Uh but in terms of recovery from the Great Depression, there's very little evidence that the New Deal contributed very much. And there's a lot of evidence that the New Deal probably extended the Great Depression by creating an atmosphere of uncertainty”

If the government credibly commits that it will no longer bail out large financial institutions (eliminating the 'too big to fail' doctrine), financial institutions would immediately become more prudent in their lending and risk-taking behavior.

“the government can say look that the government can say look until now we have been backing you either explicitly or implicitly with promises of bailouts in case you get in trouble too big to fail. We're not going to do that now. You're not too big to fail. There's no such thing as too big to fail. If you fail, it's on you. If that statement were made and if it were believed, [34:17] that's an important part. It has to be believed. It has to be a credible claim. then the financial institutions, the banks would immediately become more prudent than they currently are.”

Boudreaux acknowledges his bias toward college education (as a college professor) and states this argument against overemphasis on college goes against his professional interest.

“I say this is against my interest. I'm a college professor. I want I should have as many people come to college as possible. But I don't I I don't think that's good policy.”