Interview with Charlie Wheelan: Naked Economics

0:04The idea of comparative advantage is do what you're good at, let other people do what they're good at, and then you trade and everybody's made better off.

0:20That was Charlie Wheelan, a professor of business and public policy at Dartmouth. I'm Motley Fool producer, Mac Greer. Charlie Whelan is a bestselling author whose books include Naked Economics, Naked Money, and Naked Statistics. As you'll hear in a minute, Charlie is really great at making the complex not so complex. Motley Fool analyst Buck Hartzell and Motley Fool contributor Rich Lumelo recently had a chance to talk with Whelan about trade, technology, and a whole lot more. I'm going to start off, first of all, with tariffs, because obviously there's been since April 2nd, so-called Liberation Day, there's been a lot of changes in tariff policy.

1:01So maybe just for kind of our listeners, can you give us an idea, like, what is a tariff? And then we'll talk a little bit more about it. But I'll say, first of all, just kind of what is a tariff? It's a tax. It's a tax on something that is imported. It's an age-old tax because back before we had the capacity to do income taxes or sales taxes, the easy way to collect a tax was with customs houses. So if you go to any big old city, there's always some beautiful building. It's the customs house. Where are we going to get money from the ships that come in that are selling tea or wool or something else like that?

1:33So it's an age-old way of taxing things that come into the country. It is paid by the people who are actually bringing it in. But that's what we call like the statutory instance. That's who actually writes the check. But I think for your listeners and to understand the issue, there's a more important concept, which is kind of what's the economic incident. So who actually bears the cost? It's not the same. So I'll turn your attention to something that most people are more familiar with, which is something like a property tax. And you say, well, who pays the property tax? People who own property.

2:05But then if you say, well, I'm a renter, so I don't pay property tax. That's not true because your landlord pays it and then passes it along. So the big economic question right now is how much of these tariffs are getting passed along and to whom? And that is a very complicated but very important question. Warren Buffett said something I thought was kind of interesting. He said, I guarantee you that these tariffs aren't paid by the tooth fairy, right? And so that does get at your question. And the worry, I think, has been put out there is that the companies are going to raise their prices, they're going to pass it along, and ultimately us as consumers are going to have to eat that bill.

2:42Do you think that's the case? Or do you think it's going to be a mix that the companies eat part of it? And then how do you think that'll play out? It's definitely going to be a mix. And it depends on how competitive the industry is. It depends on how competitive the imports themselves are. So if you kind of think about broadly speaking, three entities who might end up paying, it might be the exporters. So it may be that I'm going to stop buying products from Vietnam if they're 50 % more effective. So the people exporting shrimp from Vietnam say, okay, we'll eat the tariff and we'll reduce our take.

3:18And so your price will be the same, in which case that's all being borne by somebody else. I don't think that's necessarily the case, or it could be the importers themselves. It could be the wholesalers who buy the shrimp who say, we can't afford to pass this on because nobody will buy our shrimp, in which case they eat it. Or it could be the consumers. They just pass it all along and that shrimp are 50 % more effective. My guess is depending on the industry, it's going to be some combination of all those three things. But I can guarantee you that some of it, if not most of it, is going to ultimately be borne by people going to the supermarket or by companies manufacturing, importing capital goods.

3:53At the end of the day, it's going to affect American consumers. It's just going to be more in some places than others. They say leadership isn't just about where you're going. It's about the conviction it takes to get there. For those who demand the world and possess the drive to claim it, there's a vehicle of equal distinction. Dynamic by design and engineered for pure impact, the Range Rover Sport rises to meet you the moment you take the lead. This is the most advanced Range Rover Sport yet, a master class in uncompromised performance and unbridled agility. Inside, the innovation is seamless.

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5:00In 2024, we had a trade imbalance here in the United States. It was about $1.2 trillion. And I just saw, I think last month or so, they reported that we took in$28 billion extra. And my question for you is, in simplest terms, if we run a negative trade imbalance, does that mean we're getting ripped off by other countries? No, it definitely doesn't. One good reason you might run a trade imbalance is, say, if you're growing really quickly. So my recollection is that the United States ran big trade imbalances in the 19th century because we were building railroads, we were building canals, we're making all these other capital investments that took a lot of our internal capital.

5:40So in the process, we had to kind of borrow money from the rest of the world, buy more from them than we sold to them. And it made us a more productive country in the long run. If you think about it on an individual basis, and there are limits to that comparison, but should you be spending more than you earn? And the answer is it depends. If you're spending more than you earn because you're borrowing to go to medical school, bring it on. If you're spending more than you earn because you want a bigger television and there's no prospect that your income is going up, you probably have just borrowed against the future and won't be able to pay it back.

6:09So there's nothing inherently wrong with a trade imbalance. So Charlie, in your eyes, I think you called tariffs economic self-sabotage. Can tariffs ever be justified economically or are they always, you know, like you said, self-sabotage? I can imagine a couple cases where they could be productive. One would be if you were to tax carbon or something like that. And, you know, I'm kind of an economic purist, as are most economists, including my former University of Chicago colleagues. And they would say, look, if you tax something, it does two things. It raises revenue. Everyone knows about that.

6:41And it changes behavior. So in general, first order of tax policy is tax things you want to discourage, tax smoking, not capital spending, and so on. So if we were to do a carbon tax, I think that's politically unlikely, but probably economically advisable, and other countries didn't, then what would happen is all industry would just move to India and pollute as much. So what you would do is you might do some kind of carbon tariff so that there was no advantage to polluting in some other country and then importing the products to the U.S. That's pretty targeted. I would ask the national security folks, when they look at countries like China or India, are there tariffs that might strategically affect our national security situation?

7:25But other than that, I can't think of too many cases where your run-of-the-mill economist of any political persuasion is going to say the tariffs are particularly good policy. Sure. And you make a strong case in naked economics for free trade based on comparative advantage, like that whole concept of that. Why does that still generate so much resistance, political resistance, however you want to define it? It's just such a counterintuitive idea. I think even Abraham Lincoln said, wait a minute, why should I buy rails for the railroads from England? If I do that, they get the money and we get the rails.

7:58But if we do it ourselves, then we get the money and the rails. It's just why in the world should I buy pencils when I can make my own pencils and then I won't spend money on them. Well, the answer is it would take me all day to make a pencil. And then I have no time to write books, which is what I'm better at. So the idea of comparative advantage is do what you're good at, let other people do what they're good at, and then you trade and everybody's made better off. Yeah. And I've had, you know, somebody I spoke to in the business world that said, you know, and this was a few years ago, they said, Hey, anything with a high labor input, if it is over 20 % of the cost of that good.

8:35It's going overseas. I mean, it's pretty much gone over now. And I think it's hard for people here when they hear at a high level that says, hey, jobs coming back. We want more jobs here, right? Everybody wants more jobs. Do we want manufacturing and all that kind of stuff? But then you have to think about the cost. Do you want to pay extra for that car? Or do you want to pay extra for that lawnmower or any of those other things? Because if our labor costs are higher, well, then it's going to get passed on, right? Ultimately to the end customer. Yeah, I would add one other thing that I think has gotten way too little attention of late is that the big driver of job loss is technology, particularly in manufacturing.

9:13U.S. manufacturing is quite healthy when you look at the value of output, but the jobs are being destroyed by robots, eventually by AI, maybe already by AI. And so even if we do bring manufacturing back to the U.S. and if the tariffs are high enough, we probably will. most of the good jobs are going to be going to robots or relatively high skilled workers who are going to be making a lot. It's not going to be going to the low skilled workers who feel that they've been left behind rightfully. So I think it's not necessarily a remedy that's going to bring back the manufacturing jobs that we've kind of glorified from the 1950s.

9:49It's going to bring back the 21st century kind of manufacturing jobs. And it's just not going to help a lot of people without significant skills. Yeah. And of course, there's a lot of fear by a lot of people around about the development of artificial intelligence, that it's going to take away, you know, everyone's job. And I, you know, what I say generally for folks is yes, there will be some disintermediation there for sure. But if you look at back at the early 1900s, roughly 30 % of our people were working in agriculture. How many people work on a farm today? It's not much because we have tractors and combines and all this kind of stuff.

10:22You don't need as many people because we have a lot of equipment that can do the same job. Hopefully they're freed up to do higher level work and employment things for many of those people. Yeah. I mean, just think about a political campaign that someone might run to bring back 19th century agricultural jobs, right? I'm going to put a hoe in your hand and you're going to be out there. People think you're crazy. And even manufacturing job, my colleague, Doug Irwin, who is kind of the authority on trade, is we forget that most of these manufacturing jobs were mindlessly boring, dangerous, repetitive.

10:54Yeah. And so what we I think what we really want is the security that came with them. And that's a complicated, you know, that if you went to work when you're 18, you could be guaranteed you had a job. It would be hard to get fired and so on. So I think people are conflating the economic security of that era with the jobs themselves, which for the most part were pretty lousy. So Howard Marks, I spoke to him recently. He's a great distressed debt investor. And he said, basically, America has operated for most of the last 45 years like we have a golden credit card, and it doesn't ever need to be repaid.

11:30So my question is, and this is one right, what is the level of debt to GDP that you're comfortable with? And are we near or over that mark where we get to be a little bit uncomfortable? And what do you think we can do about that? I think it's a bigger issue. It wasn't certainly a big campaign issue this time around. But what are your thoughts on that? I am a debt pessimist. There's no golden rule for the right proportion of debt to GDP. Judd Gregg, former senator from New Hampshire, New Hampshire is a small state. I play golf with Judd Gregg. He used to say, look, to get into the European Union, I think you couldn't be above 60 % of debt to GDP.

12:10So he kind of threw out that number, acknowledging that it's somewhat arbitrary. You could also use, say, World War II as a U.S. sign point. People used to say, like, we're getting close to the rate of debt to GDP as in World War II. Now we've blown past it. So there's no point at which people begin to panic, but we're all old enough here to know that at some point when people lose confidence, you don't get a memo that says, hey, by the way, next Monday, people are going to start bailing out of mortgage-backed securities. You just wake up and it happens. So I'm deeply concerned for a couple of reasons.

12:45One is I don't think it's sustainable. My favorite aphorism in economics is if it can't go on forever, it won't. So at what point do we stop? The second is I consider it to be kind of a barometer of political dysfunction, which is we can disagree about all kinds of other things, but I don't think there's anybody who is pro-debt per se. And the rising debt is just an indicator that the system we've got can't agree on a package of spending and taxes. You could have higher taxes and higher spending. You could have lower taxes, lower spending. There are a lot of right answers, but you can't go on spending lots and not taxing at a high rate.

13:24And that's kind of what we're doing. And to me, that's just a measure of our inability to solve that problem. And then you can extrapolate to a whole bunch of other problems that we're not solving. You're starting to see real interest rates creep up. That makes it tough for bond investors. It has all kinds of peripheral impact. those who were trying to buy a home, mortgage rates, and so on. So I am very concerned about the level of debt and our incapacity to deal with it. What do you think that economic tipping point, just put on your prediction hat, what do you think that economic tipping point could look like?

13:57I think it looks like a fragility that then gets knocked over by something else. You say, you know, you think about a medical example, where you've got weakness in your bones, you know, when is it going to be a problem? Well, we don't know until you fall walking the dog. And then so the question is, is there a geopolitical conflict? So the world is so dangerous at present. China, Ukraine, Israel, Gaza. Is there something external that then topples the status quo in ways that spooks bond investors? Is there a small default somewhere else? You know, is it a municipal entity or some big bond investor?

14:37So, you know, as well as I do, that investors get spooked. The herd is quite dangerous. I don't know what could spook them, but they do get spooked. Trading at Schwab is now powered by Ameritrade, giving you even more specialized support than ever before. Like access to the Trade Desk, our team of passionate traders ready to tackle anything from the most complex trading questions to a simple strategy gut check. Need assistance? No problem. Get 24-7 professional answers and live help and access support by phone, email, and in-platform chat. That's how Schwab is here for you, to help you trade brilliantly.

15:13Learn more at schwab.com slash trading. I'm going to conclude here my portion with some buy, sell, or hold comments. I think you're familiar with this. I am. I'm going to throw out a topic. You can tell me if you're a buyer, a seller, or a hold. And if you want to add a few words of why, that would be great to hear. So first one is buy, sell, or hold social media as a source of information for people. I'm going to sell and it's going to mostly, this is a wish. This is one of those investments where I want to be right. I might not necessarily be right. It has been so damaging to so many things that we care about, everything from youth mental health to democracy to news gathering, that I would like to believe that we're going to be able to put some constraints around it that will make it better.

16:01What those look like, I have no idea, but I really think it's important. Buy, sell, or hold, AI, artificial intelligence-infused robots or agents, will be teaching many college courses at Dartmouth five years from now. I'm going to hold. I do think that there's enormous potential for AI to enhance the classroom experience. I don't know that it's going to replace the professor's minutes just because I'm the one sitting here. But certainly TAs, small groups, there's so much you can do to amplify the learning experience, as with other kinds of technology. But I still think you're probably going to need some conductor orchestrating all that.

16:43So you might go to a model with fewer professors, with AI-assisted robots, which is kind of why I'm at a hold. But I do think there's a lot of promise there. I'm going to point the lens at myself and Rich this time. Same question, buy, sell, or hold. AI investing bots and agents will be making all of your, Charlie's, investing decisions five years from now. You won't need the Motley Fool or anyone else. I'm going to do another hold. I'm looking very cowardly here. We know that actually taking passion and emotion out of investing is really good. There's a famous study I reference in Naked Economics where there's a group of people who have damaged a part of their brain.

17:25It was not an experiment. It was not deliberately done, but it affected their emotional capacity. And they turned out to do better at investing games because if it was a good bet, they made it. If they lost nine times in a row, they didn't care. They kept making good bets. So I think that bots and AI could help enormously. But we're, again, old enough to remember program trading and technology-assisted crashes. And so, again, I kind of want some guardrails, some adults in the room to make sure that our bots don't go in places that could be catastrophic, which I guess is probably the lesson for all of AI.

17:59Charlie, I'll just throw one or two buy-seller holds out at you. Do we, in the next six months or so, arrive at a tariff deal that's attractive for both sides between us and China? I'm going to sell. It just seems like there are too many outstanding issues. You know, Taiwan's lurking out there and we haven't done anything on that. You've got the human rights issues, which you haven't talked about in a long time. I think there's too much on the table to think. And the tariffs are just the most tangible sign of those disagreements. So I'm not confident that we're going to resolve the bigger U.S.-China relationship.

18:35And if we don't do that, then it's unlikely that we're going to come to a harmonious tariff deal. OK. And buy, sell, or hold, do we have a new Fed chair before May of 2026? I hope not. I'm going to sell. So I'm a Powell fan. In fact, by coincidence, I was in Chicago when he made that speech kind of warning about the inflationary impacts of tariffs. And that was, I think, the first time he got the president quite exercised. So I think Powell has done a yeoman's job at the Fed. I think he's exercised independence. And most important, he's been an articulate defender of the importance of Fed independence, and it would be a real blow for the system to see that violated.

19:18That was Charlie Whelan. His books include Naked Economics, Undressing the Dismal Science. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for it, so don't buy or sell stock space solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Matt Greer. Thanks for listening, and we will see you tomorrow.