← The Al Franken Podcast
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- [00:00]
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- [00:58]
Al Franken
Hey everybody, we got a great one today. You know, for a change, because this one is guest hosted by my friend and friend of the show, Katherine Rampel. You see, I'm taking a little break from the podcast. I've been doing this show for seven years and I deserve it. And also, nothing is happening. Well, Catherine can tell you more about that. Now. You might remember Catherine from her previous appearances on the show, but in case you forgot, I'll tell you why Kathryn is so great. Kathryn is economics editor over at the Bulwark and an anchor on Ms. Now's the Weekend prime time, which airs Saturdays and Sundays from 6pm to 9pm Eastern. And of course, before moving to the Bulwark, Katherine was a columnist at the Washington Post for over a decade. You may remember that when Katherine joined us on the podcast right after Trump's Liberation Day speech, her immediate reaction was this is going to cause chaos. And chaos is, of course, what we got. Katherine truly is one of my favorite experts to have on the show. And today Kathryn Rampel os the Al Franken Podcast. I can guarantee that this is going to be a great one, you know, for a change. So Kathryn, take it away.
- [02:29]
Katherine Rampel
Hello everyone. I'm Katherine Rampel. Your pal Al Franken is off this week. I will be doing my very best impression of a former senator from Minnesota, comedian in his pocket place. Normally, when I am not filling in for Elle, I am the economics editor at the Bulwark and an anchor at Ms. Now. I mostly focus on economic policy and the like, which is why I Am so delighted to talk today with Scott Lincecomb. He is the Vice President of Economics at the Cato Institute, senior Lecturer at Duke University Law School, author of the Capitalism newsletter at the Dispatch. Wow. I have a very long portion of your CV to read. That newsletter focuses on the intersection of economic policy, trade and regulation and you are a contributor to the Dispatch Markets weekly newsletter. Am I forgetting anything, Scott?
- [03:27]
Scott Lincecomb
My Bloomberg column.
- [03:28]
Katherine Rampel
Your Bloomberg column, man, you are. You're a master of the many revenue streams there, I hope.
- [03:35]
Scott Lincecomb
Hey, you gotta, I got a kid to put through college, you know, that's what you gotta do.
- [03:40]
Katherine Rampel
So Scott, you and I often talk texting at weird hours of the day and night because I'm asking you random tariff related questions among other things. So I'm very excited to have a longer chunk of time to talk with you like during a normal hour of the day about trade stuff. And the first thing I was hoping we could talk about is what is going on with the IIPA tariff refund process. Like explain what that is and where things stand right now.
- [04:11]
Scott Lincecomb
Of course. So folks listening probably recall seeing some news about the Supreme Court overturning invalidating President Trump's emergency tariffs. As everybody knows, last year President Trump imposed a bunch of different tariffs under a bunch of different laws. The biggest chunk of them this global tariffs, reciprocal tariffs and ones related to fentanyl were under are the International Emergency Economic Powers act or ipa. The Supreme Court in February said no President Trump, you can't do that. The law doesn't allow any president to impose any kind of tariff. The end. But the Supreme Court did not say anything about refunds, which was pretty expected by folks who follow the court and understand how the court deals with issues like this. Instead the Supreme Court did what was expected. They punted it back to the lower courts in this case the Court of International Trade to deal with the refund issue. Because we were talking about $166 billion in emergency tariffs collected last year, all of which were illegal and had to be returned somehow.
- [05:24]
Katherine Rampel
Wait, can I, can I just interrupt you for a second? Why was it expected that the Supreme Court would punt? Like isn't it kind of their job to resolve these issues? If the President is laying a $166 billion worth of illegal slash unconstitutional taxes like shouldn't they say please give the money back?
- [05:47]
Scott Lincecomb
Yeah, yes and no. So first they don't have to say give the money back because it is a long standing law and policy that illegally collected taxes of any sort are going to be returned. Now you Might have to sue for them. You don't just get to wake up and the IRS sends you a check or in this case the customs Department. But in general the court did not have to say and oh by the way, now you got to return the money. The other reason though is that the court tends not to want to weigh in on what can be highly technical issues, things that require specific expertise. Like a court of international trade, on the other hand would be deal with all the time. One of the things we mentioned we had, we filed an amicus brief with the Supreme Court on a lot of these nuts and bolts practical policies.
- [06:41]
Katherine Rampel
The Cato Institute. When you say we.
- [06:43]
Scott Lincecomb
Yes, Cato Institute. We some of my, my policies fellow scholars at Cato and I filed this big long brief responding a bunch of the administration's ridiculous claims about, you know, economic calamity would prevail and you know, befall the nation if, if they these tariffs were eliminated, all those kind of things. But we also got into the refund issue. We said no, this is very common. Refunds happen all the time. They happen for all sor sorts of reasons. And you shouldn't you that be in the court shouldn't shy away from ruling against the administration just because refunds, you know, you might have to give the money back. No, that just happens just larger in scale that that's it. Right. But going back to why the court does this ideally and you know, we were, you know, fingers crossed, kind of hoping and praying that the court would weigh in and say automatically refund all the money immediately. But we generally that was a long shot and it was pretty much expected the court would do what it did. It rules on the law, the IEPA and then it says and now lower courts, you deal with all that nitty gritty stuff. That isn't our job.
- [07:43]
Spinquest Advertiser
Right.
- [07:44]
Scott Lincecomb
And so that's what they did. And the Court of National Trade picked up that the mantle from the Supreme Court and and I say to their great credit, quickly decided to not mess around with any. There had been thousands of cases filed with the court wanting refunds over kind of between basically December and, and late February. So before the ruling, after ruling, everybody was suing to try to get in line for potential refunds. The court said no, we're consolidating all of this stuff into one action and you customs need to come up with a system to give everybody this money back instantly. That was great and pretty unexpected. We I most observers thought that we were going to have to wait a couple months for that to happen. It Took a couple weeks, but Customs immediately comes back and in very typical bureaucrat fashion says, oh, we can't, we can't do it. It's not that easy. We, we have to create a system and we have to do all these things.
- [08:47]
Katherine Rampel
So just so I understand, like, were they dragging their feet because Donald Trump didn't want to pay the money back? Is this like actually a difficult thing to do? Like, walk me through how much of this is just actual technical limitations and how much of this is we, we want to do what the boss says, which is not getting the money back.
- [09:11]
Scott Lincecomb
Right. So yeah, because you, you have to remember right after the Supreme Court issued the ruling, it was both Trump and Secretary of Treasury Scott Bessant were out there saying, good luck getting your money back.
- [09:23]
Katherine Rampel
Which Right, exactly.
- [09:24]
Scott Lincecomb
Had had me carrying like my little torch and pitchfork about to go back to Washington because it's crazy that they were, they were bragging about maybe stealing $166 billion. But to Customs, to CBP credit, they, they were not, they did not seem to be playing a kind of stall tactic. Now, who knows if behind the scenes that's what they're trying to do, but in general, CBP has been moving pretty quickly for the speed of government. I mean, they're, they're, they have this system now established. They've started the process. Now that said, this is not all wine and roses because there have been instances of blanket refunds going back just a few, you know, just about a decade. Within the last decade, we've had two really big bulk refunds. This program called the Generalized System of Preferences, which gives duty free access to, to developing countries for certain imports while that program lapses every once in a while. And then Congress will reauthorize it and they'll reauthorize it retroactively. So there'll be like two, three years of tariffs that had been collected that shouldn't have been had GSP and been in place. And Customs has literally just issued notice, pushed a button, and everybody gets a check or a virtual, you know, it goes back into their account. So theoretically this could have been the press of a button. But for whatever reason, and I don't know why, and it really depends on who you ask. You know, I am, I am not a trade lawyer any longer. I never did Customs work at that kind of granular level of like dealing with like ACE forms and stuff, which is the automated system. But if you ask, if you ask half of the customs bar, they will say, oh, this is all bs. They could have Just pushed a button. If you ask the other half, and typically the ones that are like former customs officials. So it's kind of like the bureaucrats and the libertarians fighting each other. They'll say, no, you can't. It's not that easy. You have to deal with this and that. I don't, I don't know who's right. My. Of course, I'm a libertarian, so I'm skeptical, but I do think Customs deserves a tiny bit of credit. A little, little more than a tiny. That they are moving to give this money back.
- [11:45]
Katherine Rampel
Okay. And do we know, like, how much has gone out at this point?
- [11:49]
Scott Lincecomb
Yeah, not that much. We're looking at somewhere over 10 billion has actually had bank accounts. Somewhere around maybe 50 billion has supposedly been authorized, which is pretty decent because we're now about in, like, the second month of the process being live. Now, there is a big asterisk on that 50 billion, though, and that gets into. I think there's a ton of open questions. The first asterisk, of course, is that 50 billion sounds like a lot, but it's only a third, not even a third of 166 billion plus interest, because they owe 4 to 6% interest on this stuff. We've calculated over at Cato, we're. We're already at about $6 billion in total interest on that. On that $166 billion nut. And so the 50 billion sounds like, great, but I mean, even then. But there's. There's another asterisk buried in there, and that's that Customs has been very clear that it's going to scrutinize the forms that, that importers submit to get their money back because they have to submit paperwork. It's all, you know, typical paperwork. And they're going to then apply the tariffs that would have been in place but for that IPA tariffs. Because Trump's tariffs are extremely convoluted. It's one of the big problems with them. They're very complex. They stack on top of each other and they do all these things. So customs had to go back and basically say, aha. If the IPA tariffs never existed, there would have been some steel tariffs on there, there would have been some auto tariffs. So we have to recalculate everything. So there, there, even though they say we've gone through 50 billion, it might, that might only end up generating, and this is totally random, $40 billion hitting people's bank accounts. So we don't know any of that yet.
- [13:34]
Katherine Rampel
Well, but, so if you're a business and you paid however many millions of dollars last year and a bunch of them have, do you have any idea, like, how much money is even expected to hit your bank account? Like, it seems like it's, they're like throwing stuff at the ceiling and saying, okay, this is the, this is the amount that's coming back.
- [13:55]
Scott Lincecomb
And so I think you can ballpark it because, you know, let's face it, these especially sophisticated importers, the Costcos of the world, the GMs of the world, they have pretty advanced systems that can kind of recalculate what they owe. So for them, I think they can come pretty close. And we've seen some really large importers say we are expecting 500 million or, you know, 1.5 billion in refunds, which, and they've, they've reported that to their shareholders and you know, they're bound by SEC disclosure rules and so that's that. I think they can do that now. Small guys have no idea. And this, this is one of the great inequities that's emerging in this system. And I think it's a big problem is that we really, at this point, I think it's, we should expect, without some sort of intervention by Congress or some sort of change by customs, we should expect that even after the system, the refunds are quote, unquote, complete, the feds are going to get to keep, you know, tens of billions of illegally collected tariffs. Because by opting into the system, by having to submit forms to customs, it requires a level of sophistication that a lot of the smallest importers simply don't have. You know, these are folks that maybe import $10,000 of stuff a year and so they maybe are owed 1500 bucks by the government. Right? So for those folks, then they're like, well, I mean, the time and effort it's going to take for me to get a lawyer and figure out all this stuff, it's not worth $1,500. Others will say, well, actually I'm owed $15,000. But you know, I did all this paperwork myself and I'm not confident that during the chaos, that was 2025 tariff time. And if you ask anybody in last year, I mean, it was just ripping your hair out constantly because the rules were changing in 24 hours and they didn't even have the instructions to fill the write up, fill out the paperwork. So you've heard some importers say, you know what, we're owed 15 grand and we're still not going to do it. Because the last thing I want is to get a call from customs that says I now owe penalties because I did it wrong.
- [16:19]
Katherine Rampel
Yeah, yeah, I've heard this anecdotally, that there are companies out there that are worried about filing for the money that the Supreme Court suggests that they are legally owed. Right. That these were illegal taxes, unconstitutional taxes that the President made them pay. And they're just like, I'm not gonna bother. Cause I don't know about what kind of retaliation I might be due for, you know, even if I'm in the right here. Like, I. It was reported that Amazon wasn't filing for a refund. I don't know if that's still the case. I've asked. I've contacted Amazon like six times in the past week and they have not replied. But I've talked with smaller businesses, same deal. They're worried that, like, however much money they might be getting back, the. If they got some. If they actually did get something wrong, that would be costly. And then even if they didn't get something wrong, having to prove their innocence, just like, you know, going through an IRS audit is costly. Even if, at the end of the day you don't owe anything, that this will not be worth it. And I don't have a great sense of, like, whether those are valid concerns. Donald Trump did say publicly that he would be paying attention to who doesn't file. He said that on cnbc. So it's not like it's totally outside of the realm of possibility. But, like, do you. Is it a reasonable fear that this process could be weaponized against companies?
- [17:48]
Scott Lincecomb
Yeah, you know, the weaponized is a bit of a loaded term. But I think that it's. It's definitely true that you are, you are exposing yourself when you to potential scrutiny, retaliation, political retribution, consumer lawsuits as well. Right. Because consumers are mad they're not getting their refunds. And look, I, as a consumer myself, I have a lot of sympathy there. But at the. Legally, the process has to start with the importer. You can't get really mad at the Walmart's, Costcos and GMs of the world for getting their money back. You have to, you know, deal with that later. You can't just be like, I want my check. Right? So, so, but. But some companies might just be like, you know what? I don't want to get sued. I don't want to have to be in court. I don't want to have Donald Trump notice that I got a big refund and suddenly call me and, and tell me I have to give it Back, even though I ate a lot of the tariff. Because you got to remember last year, a lot of companies didn't pass on these tariffs. They were waiting for the court decisions. They just simply wanted to maintain market share and keep saying their clients good graces for whatever reason. Some companies pass them on, a lot of companies pass them on, but a
- [19:04]
Katherine Rampel
lot of them didn't or some combination. They passed along part.
- [19:08]
Scott Lincecomb
Exactly. And they ate part and they spread it out over different merchandise and they did all sorts of things to, you know, deal with that pain. So. But I think it just is going to depend on the company. I think, you know, every company is going through with it comes to tariff readings. A cost benefit, right? Is it worth, is the juice worth the squeeze? And I think for this is, you know, one of the great inequities of, of all of the Trump tariff saga we've been through is that it just is repeatedly screw. It repeatedly screws over small business. So small business gets screwed over on the front end because tariffs have to be paid up front. They're not, it's not like a income tax, right? You don't, you don't have money yet from the sales of the stuff you're paying tariffs on. You don't have the capital runways and the supply chains and of course the lawyers and lobbyists to help you minimize your duty liability or lobby for an exemption. You don't have any of that. So you're paying the tariffs up front. And then on refunds you're like, ugh, do I really want to do this to get maybe $10,000 back, right? Do I want to spend 10,000 on lawyers to get 10,000 back? Even though $10,000 for a small business, that can be the difference between a profit year, a profitable year, and having a loss. And that stinks. And it's. So they get screwed on the front end, they get screwed on the back end. And, but that's, I think that's where we are and I think that's we're going to, where we're going to end up. You know, we've been saying at Cato, I've been yelling it from the, from the mountaintops that there is a role for Congress here and that is to mandate a blanket automatic refund system, just like they did with that GSP program. Go tell Customs, figure it out. Whoever paid whatever dollar amount, give it back. The end. That's how it works. And they, they just, Congress, of course, you know, they don't, they don't do much of anything. They're not doing that. And because of this, because the system that customs has created is this opt in system, a pretty heavily bureaucratic system. You're, you're inevitably going to have. It's going to kind of filter out folks through these various stages. And at the end of, I don't know, my guess is we'll be here in a year, the process will basically be finished and you'll be looking at maybe, you know, 30, 40 billion that's sitting around still with the government because they, you know, I mean, look, 125 billion in refunds pretty good, but not when you're keeping 40 billion. That mainly came from American businesses and especially small businesses.
- [21:35]
Katherine Rampel
Yeah. And their customers as well.
- [21:37]
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- [21:38]
Katherine Rampel
The point about small businesses being screwed is one that I hear over and over and over again. And when I am talking with the people who run smaller businesses, they're pissed off that basically they don't have the deep pockets and connections to advocate for exemptions. Right. Like, you know, they don't have a Tim Cook who can go to the White House and give a golden trophy to the president so that their products can be exempted from these tariffs. And they're like, why am I. Well, you know, like, I've talked to the guy who was the CEO of the company that makes Trump's favorite shoes, Florsheim shoes. You know, the shoes. You see all these photos of like Marco Rubio and other people wearing shoes that are too big. It's Florsheim shoes. And you know, he, he was saying like, my, why are my shoes, you know, of strategic interest to the United States? I don't think they are. And same thing. Somebody who makes sunglasses and somebody who make, you know, who's somebody who imports some kind of obscure alcohol product. They're like, what? I get it with chips, I get it with, you know, rare earths or whatever, like certain other things. But why is my thing of strategic interest and then on top, you know, like. And I can't, I don't have the connections to like, make that argument directly to Besant or to Lutnik or to Trump.
- [22:57]
Scott Lincecomb
Exactly. And you. And they don't have the supply chain flexibility. You know, a lot of supply. A lot of major multinationals have factories in several countries, including in the United States. Right. And the little guys, they don't, they can't say, oh, okay, now the China tariff is 100%. I'm just going to go switch over to Mexico or I'm going to rejigger some things and up production at my US Plant. No, they're importing from China. That's it. And they're paying that 100%. And I think the other thing with small businesses and you hear this a ton of is a lot of smaller businesses do contract manufacturing and a lot of it is in China because China just has the scale. And so they, they, it's their stuff that's sitting on the boat coming to them. It's their intellectual property. They own it already. It's not like they went out to China or US and bought. It's their products, their designs. And the tariffs happened so quickly that they couldn't. What are you gonna do? The order has been placed in a lot of cases. It was literally, you know, getting wheeled out to the, to the boat and they just have to pay the tariff or they have to reject the shipment and then they have nothing to sell. Right. And you hear that repeatedly. And I think, you know, one of the, one of there are many criticisms of the Trump tariffs. But even if you are a protectionist, you know, God help you, you could, you can design a system that makes some sense, right? Okay. We're gonna, we're gonna give you a boost your domestic production or get out of China or do anything like that. We didn't do any of that. Right. I mean, we just said one day Trump woke up and said, liberation Day is coming. And then a couple of weeks later, you had these sky high tariffs on all these products from all these countries. China retaliated. Next thing you know, we were at like 140% on Chinese imports, which is, you know, effective embargo. And for the smallest guys that can't get a exemption like Tim Cook did, that's your choice is, you know, pay the man or go bankrupt. And now you're. So you paid the man, you survived, and now you're trying to get your money back and you're dealing with, you know, maybe putting another bullseye on your back or at least just getting a call from customs and saying you screwed up your paperwork and oh, by the way, you owe money.
- [25:19]
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Katherine Rampel
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- [27:49]
Katherine Rampel
Is there any evidence that there has been more reshoring in the past year?
- [27:57]
Scott Lincecomb
A little, but, but more anecdotal. Nothing in the hard data yet. So, you know, one of the hard things for you and me, and you certainly know this, is that the, the data are all lagged by in some cases like six months. You have to wa before you're getting the data you want, especially if you want to wait, if you want to be a real nerd and wait for the revisions because you know, the initial estimates are always junk. So I think the long, the long and short of it is there's been no noticeable uptick.
- [28:30]
Katherine Rampel
I mean there are fewer manufacturing jobs today. Than there are when Trump.
- [28:34]
Scott Lincecomb
So the jobs. Right. And jobs, you know, that can be for all sorts of reasons because productivity in manufacturing has gone up a little bit, output has gone up a little bit. But like actual like hard investment, it's down from the kind of Biden boom years, chips act, IRA and just coming out of the pandemic, it's so it's, we're, the investments actually slowed from that. If you look at like BEA for some reason produces an automotive specific data set, which, that's the Bureau of Economic. Yeah, it's great because you can, you can actually look at automotive output and investment and, and they now have that through the first quarter. It's actually down a little bit from, from early last year. So it's, it's kind of trending in the wrong direction.
- [29:18]
Katherine Rampel
And, and that's because what they're like paying more on tariffs on steel and.
- [29:24]
Scott Lincecomb
Yeah, because, and the, yeah. And the uncertainty. Right. That's the other big thing, you heard this a million times last year from companies large and small that they don't know what the heck the tariff is going to be tomorrow. They don't know what the heck the deal Trump is negotiating and how it's going to change. And all of that uncertainty just, it doesn't mean they're going to go out of business. It just means they aren't going to spend, they're not going to hire, they're not going to invest. I think one of the reasons why we're in this kind of low hire, low fire environment outside of, you know, the non cyclical industries like health care is because you had a lot of folks going, I don't know what's going on. Right. And I'm going to wait. And you know, I think one of the reasons why we've seen maybe a little uptick since January, part of it is because of the full expensing and tax stuff, but part of it is that the tariffs, the Supreme Court took away Trump's favorite tariff toy, which you know, is that little tariff switch in the old office. And that's just instant and permanent uncertainty in what dealing with $4 trillion in annual goods trade. I mean that's, that's a lot of money even for a $30 trillion US economy. So going back to, by the way, the BEA Automotive data set, I'll just say you look at that, it's pretty much flat. And overall manufacturing last year was, it was down for most of the year. It started to come up a little bit at the end of the year. But Certainly there's no boom there. The only thing you, the only thing, if I'm going to play devil's advocate, is Trump has all these deals and all these investments were prospective. Right. So maybe something happens this year. But with Iran, you know, I, if I had to bet on it, I would say we're not going to 2026. Won't be a boom year either for, for manufacturing.
- [31:20]
Katherine Rampel
Okay. So, but this money is hitting companies bank accounts. And so to the extent that, like I take your point about uncertainty was a large part of the reason why companies were maybe not expanding and not investing and whatever, and may have even been laying off workers, now this money is flowing back to them, at least in part. Does that suggest that, like the golden age that Donald Trump has been promising will soon be upon us because he has stopped in some ways obstructing that golden like, you know, or the Supreme Court has forced him to stop obstructing, you know, this, this economic development? Yeah, yeah.
- [31:58]
Scott Lincecomb
Unfortunately, no. By the way, big shout out to the Economist this week, which did a great piece looking at, they did some kind of back of napkin math on what the US Economy might be doing without all of the tariffs and the deportations and the uncertainty. Oh, it's pretty cool.
- [32:13]
Katherine Rampel
I got to check it out.
- [32:14]
Scott Lincecomb
It's neat. And look, it's all, this is all kind of, again, it's napkin math. It's not like really rigorous analysis, but it's pretty interesting, right? They said that, you know, the US economy could be growing above 4% with this AI boom, but the deportations and the tariffs have us probably like a 1 percentage point drag off what we could be doing because of these dumb unforced errors. Pretty interesting. The unfortunate thing is that US Law has alternatives for Donald Trump to reimpose tariffs. And so he's already gone. You know, the day after the Supreme Court decision, they implemented the Section 122 global tariffs of 10%. They've launched about 40 new investigations under Section 301, which is deals with unfair trading practices abroad. And they have all these section 232 tariffs and investigations, section 232s for national security. So long story short, there's a lot of numbers in there. Long story short is there are other laws that are going to allow Trump to put together most of the IIPA tariff wall just using other statutes, some of which, like the 232 and 301s, those are more legally durable, I think, you know, 122 is questionable. The, the lower court The Court of International trade ruled the 122 tariffs illegal. Good, good, right. But you got to go to the Federal Circuit and then you gotta maybe go to the Supreme Court. I think most folks say the chances of ultimate victory in the 122 case are they're, they're not terrible, but they're not as good as, I suppose, a pretty clear cut case where the statute never mentioned tariffs, it had never been used to impose tariffs. If you knew the legislative history of the law, it wasn't meant to be a tariff law. It doesn't actually even make any sense as a tariff law because it's meant to be like a wartime thing. Right. And in war, yes, you might block imports from a bad actor, you might freeze all of their assets, but you're not going to just like apply a 10% tariff. Right. That make any sense? Oh, Nazi Germany, 10% tariff on your, your tanks. Right. That's stupid. So it made good sense that IPO would get invalidated. 122 is harder. It requires the court to actually look at the facts and economics. And courts hate to do that. You know, they always go, oh, whoa, whoa, econ, come on now. So that's a question. Then the 301 and 232s, those are even more legally durable. Those have been tested in a lot of court cases. So I think the, the long and short of it is that we're going to be dealing with Trump tariffs of some form for a while. What IEEPA did and what the Supreme Court ruling did that is valuable is it removed easily the most destabilizing of the tariff tools because IPA and all these other laws have procedures and they have substantive limitations and timelines and notice in content notice and comment rules and all these types of things. Right. So what that prevents is it prevents a president from waking up on a Friday and not liking a Canadian television ad and imposing tariffs effective on a Monday, which of course Trump almost did. And it, so it takes that away and that will, I think, actually be good for the economy, good for investors, good for manufacturers, good for everybody in the sense that, yeah, you might end up still paying a 10, 15% tariff or higher, but at least you're going to know about an advance and you're going to be able to plan accordingly. Because, you know, one of the things I learned as a very, very young corporate lawyer many moons ago was companies don't really hate taxes as much as they hate unpredictable and inconsistent taxes. Right? They, you know, whatever rate it is, they'll deal with it. They'll complain probably if it's pretty high, but if it's consistent and predictable and they can know that this, whatever tax it is today is going to be the tax they're going to pay in a year, they can plan around that, right? They can't plan around the law of the horse, right? They can't plan around Donald Trump's Canadian television commercial situation. That is an additional drag. Some economists at the New York Fed a couple years ago looked at the Trump 1.0 tariffs, the China mayhem 2018, 2019. Things got a little nuts there for a little bit, and they found that it was a it cost US maybe 20 to 40 billion dollars in foregone investment just because of the uncertainty, they said that was just a big dampening effect, which makes perfect sense if again, I was still in the corporate world back then and I had clients just saying, we're waiting, we're just going to wait. So I think some of that goes away, but certainly not all of it because again, he has all these other tools.
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- [39:18]
Katherine Rampel
Yeah, and I, I think that one thing that gets kind of lost in discussions about how much this administration is dragging on the economy, it's not just like the dollars that are remitted right when you have tariffs, it's this uncertainty, it's this sense of lack of fairness. And is your product actually going to succeed because it's the best product and you have the best marketing and the most efficient operations and you're actually finding new audiences? Or is it because of all of these other screwy interventions in the form of tariffs or in the form of Donald Trump taking an interest in your industry? Like another thing that you and I have talked about a bunch in the past, besides trade policy, is this sort of other forms of command and control type policy that is coming from this White House, including a bunch of equity stakes that the President has taken in companies. I looked this up right before we hopped on this recording. According to the Council on Foreign Relations, as of late April, the US government has invested $21 billion across 16 deals involving direct ownership of American, or not just American companies, but of various kinds of companies that they're taking ownership in. There's the golden share in U.S. steel and an aluminum company and various kinds of other mining companies. And I'm sure I'm forgetting some of the other highlights here.
- [40:54]
Scott Lincecomb
No, no. And just this morning, the Wall Street Journal reported that we're taking equity stakes in nine quantum computing companies.
- [41:00]
Katherine Rampel
There you go.
- [41:01]
Scott Lincecomb
So, yeah, so now we're up to like 25 companies. And you know, again, as a libertarian, it's like, it's like curling my toes.
- [41:08]
Katherine Rampel
Yeah.
- [41:08]
Scott Lincecomb
Like, it's terrible. And you're already seeing, and, and you know, to play off that a little bit more, you're, you're already seeing evidence of the, the administration using that leverage to have those companies do things that might not make the most commercial sense, but they make maybe political sense or whatever.
- [41:25]
Katherine Rampel
So, like, what's an example of that? Yeah, yeah.
- [41:27]
Scott Lincecomb
So U.S. steel for years has been wanting to close a blast furnace facility in Granite City, Illinois. It's like 100 years old. It's had multiple, like, EPA infractions. It's, it's a facility whose time has, has come. Right. Blast furnace technology itself is pretty, it's antiquated and dirty and we don't really even use it much anymore. So they were going to close it, but it's been a political football for ages. And finally after the Trump administration approved Nippon Steel's purchase of U.S. steel and got the golden share, Nippon Steel was following through with US Steel's plan to shut down Granite City. And then the Wall Street Journal has reported Howard Lupnick gave them a call and suddenly Granite City is. Well, at first they were going to turn it into this weird jobs program where the mill wasn't even going to produce anything. But the workers were just going to, I don't know, they were going to babysit the equipment. And that, that got a lot of pushback. So the mill is now up and running. So one of the dirtiest steel mills in the country, if not the world at this point is really only operating for political reasons. Right. And that's I think a great example of how these equity stakes, the companies weren't, they don't have a choice even if it's not a, even if it's not a majority stake. Right.
- [42:47]
Katherine Rampel
Well, just to play devil's advocate for a second, like what responsibility should the government have for the people who would lose their jobs, jobs in, at this mill for for example.
- [42:55]
Scott Lincecomb
Right. Well, I mean, so yeah, I mean I would, I would say that there, if you, if, if there is a role it's for like things like unemployment insurance or you know, pensions. It's not for keeping the mill operating, you know, a this kind of antiquated, inefficient mill that is going to be taken offline years ago. Right. So you and I probably have slightly different views on what the government's role is in these situations. But I think we can, I can agree that the focus should be on adjustment, not on just keeping make work jobs alive, especially at places that are, you know, belching out coal fired pollution. Right. So focus on adjustment. Don't keep these things operating. But in the long term, of course the problem is that if you're dealing, let's say you're not dealing in steel, you're dealing in semiconductors and quantum computing. You want those companies to be really pushing the bleeding edge of innovation. Right. That you want them especially in a field like semiconductors where, you know, yields are everything and if you're not operating at maximum efficiency, you're going to lose kind of the global race in the space when you, when the government starts worrying about things are making you as a company worry about things other than those efficiencies well you, over time you, you, you lose, right? You just become you know, like, like a Jones act shipping company. Right. You know, old costly zombie firm. Not a tip, you know, kind of tip of the spear innovator. And so for steel you can go, okay, you know, so what we got a blast furnace or whatever now I think they're going to do a tin mill facility. That's another political boond. But in these really high tech areas or these areas that have national defense because they've been investing in national defense related companies like a rocket propulsion company as well as rare earth magnets and a few of these other things. Well that's where like it really, really matters that suddenly they're going to be making decisions for political reasons and not technological or commercial ones. The other I think big risk with these transactions aside from the capital misallocation.
- [45:16]
Al Franken
Right.
- [45:16]
Scott Lincecomb
Because stocks are going crazy in these companies. Not again for commercial reasons, but because everybody's like, oh, too big to fail. But the other big risk is that you're going to see some of our other, not other tech champions that aren't, that don't have government stakes still getting into bed with the government companies because they're trying to curry favor with Trump. Right. So Trump has asked SpaceX, Apple and Nvidia, so three pretty tip of the spear companies, American companies to do business with Intel. Right. Again, not because intel makes as chips as good as tsmc, but because it's the American company and has the government stake. So okay, that's going to be good for intel and intel share prices has gone up. But do we really want SpaceX and Nvidia and you know, again these American champions using subpar technology. Right. Do we? I, you know, look, I'm not going to be flying on a rocket anytime soon, but I would hope they're using the best equipment possible. Right. And, and same goes for our military, you know, our fighter jets and all that kind of stuff. And, and I think that's that that risk just increases every time there's another one of these deals announced. The risk goes further, right. That you're going to have more and more folks. You know, Spirit Airlines, good old Spirit Airlines went to Trump and tried to get their own equity stake based on this precedent that they had already set with intel and US Steel and the rest. That's, you know, there's just all these really unseen problems with, and again it goes, at the end of the day it goes back to capital misallocation which just means less productivity, less growth, slower economy overall, which Means just everybody a little poorer at the end of the day. And it's, you can't see it. You, you wake up and it's 20 years down the road and suddenly you're just not at the frontier. And that's where the big.
- [47:19]
Katherine Rampel
So how do you explain then how China, which is like a much more openly command and control style economy, it's an authoritarian country, you know, and they're not necessarily keeping plants alive because they're worried about political blowback, because they don't have to worry about voters voting them out of office, but they do have a much more authoritarian form of government and form of economy. And I think that there's a little bit of China envy that you see here in the United States. Not just, not only from folks on the left, but also from the sort of the, the, the Trump land. And yeah, for sure, you know, our President just had a visit over there and met with President Xi. But how do you respond to those kinds of, that China envy? You know, that, that kind of jealousy for the ability of the government to have more intervention in the economy and invest in, in many cases, like in the case of China, in some of the technologies of the future.
- [48:28]
Scott Lincecomb
Right. So I think with China you have to remember a few things. First is that a huge amount of China's economic success over the last 30 plus years has actually come from catch up growth due to market oriented reforms. Right. And what I mean by that is that, you know, China before 1980 basically was harming itself with communism. And a lot of the rapid growth that China has saw in the 80s, 90s, 2000s and even now is the result of market oriented reforms. And you know, some of it is trade liberalization, but a lot of it is property rights reform and all these kind of privatizations and the rest. So we have to kind of start with that. The second part is you have to note that China is still much, much poorer than the United States on a per capita basis. And what might make sense for a sort of an economy at the Chinese per capita income level probably doesn't, might not make sense for an economy like the United States that is just very wealthy and still kind of already at the frontier in terms of productivity and the rest. Right. So it might make sense for China to try to, to get ahead in ways that the United States wouldn't do. Another thing is of course China as an authoritarian regime can do some stuff economically that the United States can't do. You know, consumer suppression and worker suppression. Right. Basically keeping wages low and keeping consumers and savers kind of, you know, poorer than they should be is something that, you know, doesn't, doesn't really fly in freer places. But finally, you know, when you talk about Chinese industrial policy, you have to look at it in the big picture. And the big picture of Chinese industrial policy is there are some, some quote unquote successes, some things where. Yes. I mean if you look at Chinese EVs and SOL panels and a few other areas. Yeah. I mean they've really made some incredible strides. But the cost of the broader industrial schemes they put together is massive. So you go back to capital misallocation. There was a great paper from some IMF economists now about a year ago and they said that Chinese industrial policy was shaving something like 3% of their GDP every year. So on a compounding basis over the last 30 years, I mean that's trillions of dollars in wealth that has been lost because China has pursued this top down industrial policy, state capitalist model. Now hey, maybe again if you're China and you're kind of an up and coming nation, you're trying to get ahead in a couple areas or achieve certain geopolitical goals that make sense. It doesn't, wouldn't make sense for us to do that. Right. The. And and then of course you have to look at the rest of China's economy. If you leaving aside right. They've had a bunch of industrial policy failures. Aerospace, semiconductors. There are still areas where the United States is way, way ahead in the tech race. But even leaving aside the big industrial policy failures, you know China's economy is not in great shape. They are battling households that don't want to spend any money. Huge kind of capital misallocation issues with overcapacity in certain industries. Private and government debt are. They make us look like we're thrifty. They have. Their productivity levels are still well below frontier. And when I say frontier I mean like the best developed countries in the world, the Germany's Switzerlands, the United States of the world, we're at the frontier. China's productivity still way behind the frontier. Overall that matters, right? For being wealthy and prosperous. Demographic issues, thanks to the one child policy they're they're going to get really old really fast and before they get rich. So China's economy is one of those things where it, it's two faced there, there is certainly this humming export machine that makes a ton of stuff and some of it is really high quality. But there is a other economy the other which is pretty darn bad and, and Again, you have to ask if you're the United States, why would you want to pursue that model if you're already at the frontier? Maybe you need to do some of this for national defense. Right. Because you know, even Milton Friedman guy like me would say, sure, okay, national defense is an exception. So you need, whether it's tariffs or buy American rules or long term contracts or stockpiles, if there's like a really tight defense nexus, fine. But that's not. We're talking about. Right. We're just talking about, I mean, US Steel. Right. Automobiles. Just not, not like, you know, footwear. Right. Yeah, yeah. Thank you. I mean, you can go down the list, right. And then, oh, don't even get it started on things like banana tariffs and whatever. I mean, that makes no sense. So there's, there's not any sort of. They just want, it's just they're going to kind of China fy the whole economy, not just focus on national defense. And then I think the other thing though is that we have strengths that China doesn't have and I wish we were using them. Right. We're just very open and dynamic and our strengths are in, you know, more open trade and immigration and in letting kind of the free market and capital markets do their things. They are really, really good at a lot of things, not everything. And yet these guys, they seem to want to play away from those strengths. Right. And again, do more China, I think,
- [54:46]
Katherine Rampel
yeah, I think not. Seem, I think, you know, our president has expressed open admiration for, for, for this kind of state level intervention not unique to China. A lot of other strong men run countries, right. That, that have this kind of intervention and it's, it's hard for me to know how much of that is just like he's personally envious of having that kind of power and how much of it is like just a genuine philosophical difference that he thinks that is how you strengthen, how you make an economy great again, because he sees models like China that seem to be succeeding at least on some fronts and maybe misattribute what is behind the success versus failure, at least in as you have described things.
- [55:35]
Scott Lincecomb
Yeah, My, my guess is that it's a combination of, of those both really, you know, part of it is just this kind of strong man, you know, I alone can fix mentality, I think. But I think the other thing that plays into it is he comes from the business world and you know, running, running the macro economy is not like running a business business. In fact, somebody recently had a pretty good piece on this that, you know, actually businessmen make terrible presidents. Right. They make. Because, because it's not a balance. A corporate balance sheet is not like the trade deficit. I'm sorry, it's just not right. And, and you know, the, the global economy, the US Economy are these kind of open, dynamic systems that you cannot just pull lever and next, you know, widget come out. Right. It's just not like that. Right. And there's all these unintended consequences. There's, you know, millions of people engaging in billions of transactions. It's this incredibly wonderful, untamable organic beast and you can't reduce it to, to line items on a, on a balance sheet. And I think, though, as the kind of business mentality is, oh, well, yeah, well, of course, I just take an equity stake here and I just push this button there and boom, I run the economy. And I think. But I think that you look at a lot of the folks in his administration, a guy like Lutnick as well, these guys, these come from this world where, oh, yeah, you just pull the lever and boom, economy go. And I think that's actually obviously a big problem.
- [57:11]
Katherine Rampel
Well, I think that is a perfect place to end. About how the Trump administration is run by businessmen slash socialists in equal measure, perhaps, depending on your vantage point. Scott Lincecomb, thanks so much for taking the time to chat with me today about the world's sexiest topic of tariffs and capitalism. And thanks everyone for listening.
- [57:33]
Scott Lincecomb
My pleasure.
- [57:34]
Al Franken
Well, I hope you enjoyed listening. That beautiful music is by Leo Kotke. The great Leo Kotke. I want to thank Peter Ogburn for producing this podcast. We'll talk again next week.
- [57:56]
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