My Thoughts on Tariffs, Economic History, and the Market Decline
Below is a transcript from a recent podcast I did on the tariff news.
My business that I use for my books and my speaking and whatnot is called Long Term Words, LLC. Now, the name of that is not very important. Nobody sees it unless I’m doing a talk with you or something. But let me tell you the origin behind that name, why I picked that name, because it’s relevant to today’s episode.
I’ve always wanted at least the opportunity that anything I write in a book or an article, that it has at least a fighting chance to still be relevant, 10, 20, even 50 years from now. I only want to write about things that are timeless because I’ve never enjoyed, as a reader, reading news that has an expiration date on it.
If this news article is not going to be relevant a year from now, it shouldn’t be relevant to me today. That’s always been my philosophy, and I’ve wanted to do that with my own writing. Write things that at least have a fighting chance for somebody to read and enjoy and maybe learn from many decades into the future.
That’s always been the goal. Long term words. I bring that up because today’s episode is going to be a rare departure from that in which I’m gonna talk about something that is happening in the news today and this week, and that is tariffs and the market reaction to it. We’ll get in that as well. So if that’s not your thing, if you’re only interested in the long term words, this episode might not be for you.
So before I jump into my detailed thoughts about what I think is going on, let me put my cards on the table. I think the tariffs are a terrible idea. Not just a terrible idea, but a horrendous idea.
Now I understand that all of us, everybody, including me, everybody can live in their own bubble. Particularly for these topics where it’s very hard to divorce economics and money from politics. So if you disagree with that broad view and you think the tariffs are a good idea, let me just state I respect you. I’d love to hear you. Everyone sees the world through their own unique lens, and it’s naive to assume that my lens is clearer than yours, even if it might be different.
Look, I’m a free market person. Of course. I understand the need for law and regulation and even tariffs in certain situations like masks during covid when we are reliant on other countries for things that we desperately needed, or military supplies, you don’t wanna re reliant on other countries making your military supplies in a war.
So tariffs can absolutely have their function in a well-run economy. But this what’s going on in the last week seems completely backwards, I think, to everything that we know and have learned about economics. Let me give you one analogy that’s been helpful to me with this. For nutrition science in terms of what kind of diet should you eat, what is the best diet that you and I can eat to live the healthiest life?
Nutritionists and health experts fiercely disagree on what the best diet you should eat. Should it be keto, should you be vegan? Everything in between. There’s so many different nuanced views over nutrition. But everybody agrees that eating lots of refined sugar is bad. There’s no disagreement about that. If you’re eating lots and lots of processed, refined sugar, that’s not good for you, even if there’s so much disagreement about everything else, and I think that is how economics works as well. There is so much disagreement. Among economists and politicians and investors over how to run the economy, what’s the right level of taxation?
Should it be more, should it be less? What’s the right level of regulation? Fierce disagreements among very smart people, but tariffs are the equivalent of refined sugar. You’ll be very hard pressed to find many economists. Of course, there’s always going to be one or two standouts here or there that make a lot of noise.
But one of the most agreed upon topics in economics is that tariffs are bad and trade wars are destructive. And the broad reason why is because tariffs by and large do two things. They raise prices for consumers and they make manufacturers back at home less competitive.
And one good way to explain this, I think that’s been helpful for my thinking, is just understanding the value of specialization of trade.
Now, I am a writer. I might have some skills at writing. I do not have any skills whatsoever at plumbing or electricity.
So when I need those things resolved, I hire a plumber, I hire an electrician because they are much better at those tasks than I am in that situation. When I hire a plumber, the plumber is not taking advantage of me. Even though I have a trade deficit with him, because he’s probably not buying my books, but I’m buying his services.
I have a trade deficit with the plumber. Nobody is being taken advantage of in that situation. He has a skill that I don’t, I can exchange my money for his skills. Everybody is better off. He’s better off. I’m better off.
Most people can understand that at the individual level. And that is also true at the economic level. There are some skills that the United States has that we are ridiculously good and talented at. There are other things that other nations are much better than us. And there’s no shame in that, just in the same way that I am not shamed at the fact that I’m not good at plumbing.
It is specialization of labor. So I think in the United States historically and today, we are extremely good, I think we are the best in the world at three things, entrepreneurship, service, and very high end manufacturing like planes and, and rockets. I think we are the best in the world at that, but just like the plumber is much better at other things than I am, there are things that other countries are way better than the United States at manufacturing a lot of certain goods, particularly mass goods, particularly lower end goods like clothing and shoes.
I spoke to A CEO last week, and he told me something that was helpful in my thinking here. He said, look, if you give instructions to Chinese workers and you say, here’s how to make this part, here’s step one, step two, step three, they are better than anyone in the world at making that part.
They can do it cheaper, faster, more efficiently, higher quality. But if you went to those Chinese workers and you said, please go design me a new part, they’re not that good at it. Americans are way better at that task than assembling that part, and that’s why the back of your iPhone says, designed in California, made in China.
That’s exactly what he was speaking to.
So look, my, my standard asterisk here, you might disagree with that. You might have different views. None of this is black and white, but the statements about it almost always are, which makes this a hard thing to talk about. So if you disagree with those views, lemme say it again. I respect you. I would listen to you. I’m just putting my cards on the table.
One big factor that I think gets lost here. And I’m gonna speak in a second why I think there is such a push among certain people for tariffs and why they think there is the need for them. I’m going to speak to that in a second, but one factor that I think is very lost here is that, yes, the United States has lost a lot of manufacturing employment over the last 50 years.
Of course, it absolutely has. And often when that is addressed, it is immediately jumped to, that’s because we ship those jobs overseas. The factories that used to be in Indiana and Tennessee and Mississippi, we shipped them to Mexico and Canada and China. There is some truth to that. Of course, indisputably. There is, I think, a bigger truth that gets lost, which is that where a lot of those jobs went was not necessarily to another country, it was to automation.
My favorite example of this, I wrote this 10 years ago, I had to go fish this up from an old article that I wrote is about a US steel factory in Gary, Indiana. In 1950, this individual factory produced 6 million tons of steel with 30,000 workers. In 2010 it produced seven and a half million tons of steel with 5,000 workers. So during this period, they increased the amount of steel that they were making, and they did it with 25,000 fewer workers. They went from 30,000 workers to 5,000. That story, I think, can be repeated across virtually everything that is made in the United States and around the world over the last 50 years.
Very interesting thing that I read the other day: China, the manufacturing powerhouse of the globe, has fewer manufacturing workers today than they did 10 years ago. They’re making more stuff than ever before. They’re building factories faster than ever before, and they have fewer people working in those factories because China, more than anybody else probably throughout history, is installing and using robots and automation in their manufacturing at a ferocious pace.
And so you can keep making more and more stuff but you need fewer and fewer people working on those assembly lines. That is often lost in the debate because if we were to bring back the manufacturing capacity to the United States, and that’s a separate debate, that’s a much longer debate, but let’s say that we do, it would not in any circumstances bring back the manufacturing jobs and the employment levels that we had in the 1950s. It’s a very different world today than it was back then. One way to get a very good view of this is to go onto YouTube and search for a video of Tesla factories. Because Tesla, very similar to China, is big on automation in its assembly and robots. And compare a modern Tesla factory to the 1950s Ford assembly line. It could not be more night and day, it could not be more different. The modern assembly line is robots and machines. Versus the assembly line back in the 1950s, which was biceps and backs and legs. That today has been replaced by automation.
One other example of this in the auto industry in 1990, not that long ago, the average American auto worker like working on an assembly line, their share of total auto production was about seven vehicles per year. So take the number of vehicles that were produced in the United States, divide that by the number of auto workers, and it was about seven.
The average worker was responsible for seven vehicles per year by 2023. Again, that’s just like one generation apart. Not even that much. The average auto worker in the United States was responsible for producing 33 vehicles per year. It went from seven to 33.
So we are, we are still producing a lot of cars in the United States. We still make a lot of vehicles here in the United States. It just does not require the amount of labor that it used to.
Just a few years ago, the economics journalist Neil Irwin wrote, “in the newest factories, one can look across an airplane hangar size floor, and see only a small handful of technicians staring at computer screens, monitoring the work of the machines. Workers lifting and pushing and riveting are nowhere to be seen.” And so I think that that is how manufacturing works today. It is very high output and low head count. At least much lower than it used to be.
So even as a US faces a manufacturing boom, which it has by the way in the last decade, easy to overlook, that manufacturing just can’t be expected to create the kind of employment that you saw many decades ago.
Okay, so that is a good leadway into another topic, which is about what the world was like during the golden ages of manufacturing that we remember, you know, the people who are working in the auto plants and the steel mills in the 1950s and the 1960s and through the 1970s, I think that is by and large the world that a lot of people want to go back to. Very understandable. I do not look down upon them for wanting to go back to that world in the slightest because it was a great world. It was amazing when there were tens of millions of manufacturing jobs in the industrial parts of the United States.
The people who did not go to college, or even people who did, could go get and earn good wages, that was great. It was a wonderful thing, but lemme tell you at least part of why it occurred at the time. At the end of World War II in 1945, Europe and Japan were decimated into rubble. Whereas the United States, of course, had all of its manufacturing capacity intact and had all these gis coming home.
There were 16 million GIs who came home in 1945 and had all this pent up demand to buy homes and washing machines and cars and all the new gadgets. And because Europe and Japan were in rubble, America, by and large had global manufacturing to itself. It had like a monopoly on global manufacturing at the time because Europe and Japan was still trying to build themselves back from the devastation of the war.
China at this period was still kind of an economic backwater, wasn’t really part of the equation. It was also trying to recover from the ravages of World War II. Places like India and Bangladesh and Thailand that manufacture a lot today weren’t really part of the global manufacturing equation back then.
There was this period when, because of the state of global geopolitics, America had a manufacturing dominance to itself for a good 20 years from probably 1945 through the end of the 1960s. That was also a period when, for many different factors, we don’t need to go into all of them, but white collar workers were not making that much money.
If you worked on Wall Street in the 1970s, that was not a place to make a lot of money. That was an admin accounting job that was not very looked highly upon because you didn’t make that much money. Bankers were not making nearly the kind of money that they made in the decades before or after. This period, and that was important because the blue collar manufacturing workers, by comparison to others in the economy, to others in their town, were doing great.
So even if their wages were lower back then than they would be today, even adjusted for inflation, when the manufacturing worker compared themself to the banker or the accountant, or the lawyer or the doctor, by comparison, he said, I’m doing pretty great. I’m doing pretty well. And then two things happened starting around the 1970s that really accelerated in the eighties and nineties, which was one Japan and Europe kind of after having recovered from the ravages of World War II became manufacturing powerhouses in their own right.
One of the first signs of this was when Honda, Nissan and Toyota started selling cars in the United States, and people realized in the US that, Hey, actually. These are pretty good cars. These aren’t bad. It was easy to look down upon ‘em at first because they were small and had tiny little engines relative to the Chevy Camaro or the, the T-Bird, but this came during a period in the seventies and eighties when gas prices surged and all of a sudden those tiny little engines in a Honda Civic or a Toyota Corolla we’re what people wanted. And then all of a sudden, out of the blue, you went from incredible American dominance in car manufacturing from gm, Ford, and Chrysler to Honda, Toyota, and Nissan actually taking a lot of market share.
There’s a very good book I read a couple months ago. It’s called The Reckoning, and it’s about Ford’s decline and Nissan’s rise during this period, from the 1950s to the 1990s. And a lot of what happened to, to state it very generally, it’s more complicated than this, was companies like Ford, a GM in Chrysler, had so much dominance during this period, fifties, sixties, seventies, that when they started facing competition from foreign imports in the eighties and nineties, they kind of lost their way. They had such a stranglehold monopoly on auto manufacturing that they became much less competitive. And as I said earlier, that is one function that tariffs implement is when you don’t have to compete with foreign suppliers.
You become much less competitive. You become kind of fat and happy and lazy. In a way, and that was kind of the, the broad thesis of this book was that Ford became fat, happy, and lazy while Nissan and other Japanese auto manufacturers were just surging.
And so the manufacturing dominance, not just in autos but in lots of things, heavy machinery and whatnot, started to erode in the seventies, eighties, and nineties, and really started to explode higher in the two thousands when China really came on board in terms of global manufacturing. And that occurred at the same moment when white collar workers.
And finance and accounting and office jobs started making fortunes huge sums of money. So now at the same moment that the manufacturing worker was losing their jobs both to automation and foreign competition, the white collar workers were, were just having a field day and making money hand over fist, which made what manufacturing jobs existed feel even worse by comparison because let’s say you’re an auto worker making $25 an hour in one era, that might feel great, but if all of a sudden your neighbor who is a project manager at KPMG is making 300 grand a year, your $25 an hour doesn’t feel that great anymore. ‘cause your neighbor has, has a bigger house and more cars and is sending their kids to private school.
So by comparison, you feel worse off even if your wages adjusted for inflation may have been going up. And so you put all of that together. That is a very. Shorthand history. Of course, there are a billion variables that I left out in there, but I think that shorthand history is in broad strokes what has happened over the last 80 years.
It is so understandable that you have millions of workers who say, this economy worked for me 50 years ago and it doesn’t today. My dad, my grandpa had great jobs in the GM factory and I can’t have that today. So understandable that that would be the thought process of millions of workers, and I think it is naive and insulting for people who are on my side of the tariff debate who say tariffs are a bad idea who cannot understand the views of those kind of people. Because if I was in that situation, and if lots of people who disagree with tariffs were in that situation, they’d be arguing for the same thing.
I think one of America’s strengths over time, this has been true for hundreds of years, is this sounds kind of crazy, but I think it’s true. A firm belief in things that are probably not true. That has always been a strength of the United States. This goes back to the very early days of the settlers and the colonizers, whom back in Europe were told that America was a land of absolute abundance.
And when you got there, there would be just, you know, rivers overflowing with gold and whatnot. And actually it was like a malaria swap when they got to the East coast of the United States. But we believed it was always believed that this was the promise land. That was what brought the people over. And even when they came to the United States and settled. It was that belief too. America has always been so unbelievably optimistic, particularly at the individual level, and that’s why I think we’re so good at entrepreneurship. It’s this idea that you, the entrepreneur, even if you start as a, nobody can make it to become the next Elon Musk, Bill Gates, Henry Ford, Thomas Edison. You can make it. You can do it. Not a lot of other cultures have that level of even like optimistic ignorance, because in many ways that’s what it is. But what that’s done is it’s created this incredible entrepreneurial society that has given us and the world some incredible world changing innovations in companies over the years.
And when I pair that belief with the observation that there are tens of millions of Americans who feel like the world doesn’t work for them anymore, who feels like this economy is not working for them anymore. That worries me. It worries me that a meaningful chunk of society does not have that optimistic ignorance. I mean that in a positive sense to think that, hey, the world is my oyster. The sky is the limit. I can go do it now. We’ve been through similar periods in the past, the 1930s, the 1970s, and we recovered from those. We recovered from those malaise periods, and I’m optimistic that we’ll recover from it this time, but we should not lose track of the fact that we are in one of those periods again.
Where this goes next, my guess is as good as yours. And both of our guesses are useless beacuse I don’t think anyone knows what’s gonna happen next. Interestingly, many of you will listen to this podcast the day that I publish it, which I guess is April 8th. Some of you will listen to it weeks in the future when half of what I just said will be outdated because the situation is changing so quickly.
That gets back to why I only want to do long-term words and why this is so against what I normally do. But let me say a couple of things about. Investing because that has been the initial reaction to the tariffs has been entirely in the stock market, which as I speak here, is down about 20% or so from its highs that were reached just a couple weeks ago.
Now, the tariff impact has not hit the broader economy in terms of inflation at the grocery store or mass layoffs or whatnot. But so far it’s been in the stock market. So even if that is a very minor part of what will impact the economy, let me speak to that just a bit. I, of course have, have been glued to Twitter over the last week just trying to understand what’s happening and hear other people’s views.
I’ve watched it with a sense of shock and just confusion trying to piece together what’s happened, but it has not in the slightest changed how I invest, and I extremely doubt that it ever will. I think it is possible to be an engaged and informed citizen, even a social media junkie reading the news and a calm investor at the same time.
I purchased stocks early last week, not because of anything that was going on in the news, but because you gotta do that every month around the first of the month. I do it every single month. I’ve done that for, uh, I don’t know, 20 years now. I’ll do it next month. I’ll do it the month after that. That won’t change. I think it, it never changes. So I think you can simultaneously dollar cost average. Remain long-term, optimistic, not panic about anything that’s going on in the world. You can enjoy life, spend time outdoors, hang out with your kids, eat good food, listen to good music, have a good time, and at the same time, if you are of the same belief of me, realize how destructive and unnecessary what we’re going through is.
You can do all of that at the same time. It’s not like you have to be optimistic or pessimistic. I am very optimistic on the long term, even if I think this is a bad idea, that’s not a contradiction. Something else I’ve been thinking about is that we have in the past been through much more uncertain times than we’re going through right now, but it never feels that way, or it rarely feels that way because when we think about the past economic crises, COVID, Lehman Brothers, 9/11, Pearl Harbor, those kind of events. We know how the story ended and we know that the story did end and we know that we eventually recovered. But whenever it is a current crisis, a current period of uncertainty, you don’t know that. You don’t know when it’s going to end. You don’t know how it’s gonna end, and some people don’t know if it will ever end.
And because of that, even if, I think without a doubt what we’re going through is less uncertain, less serious than other periods of economic upheaval. It rarely feels that way because we don’t know what’s gonna happen next. So every crisis has its own little unique flavor of what’s going on. But the common denominator is this feeling that you can’t see the future anymore. And that makes people go crazy in, turns them into political junkies. It makes ‘em make bad investing decisions. That’s always been the case. Try to avoid that. I would also say that for most investors, 99% of good investing is doing nothing.
Most investing is just not doing anything, not trading, not selling. Just letting your money sit there and to hopefully grow over the years and decades. That’s 99% of good investing. 1% of good investing is how you behave when the world is going crazy. And this, I think, is one of those periods when the market falls 20% in a week.
That is one of those periods when it is so absolutely vital that you keep your head on straight. A lot of people will mix their investing decisions with their political beliefs, and 99% of the time, that is a mistake that you are not gonna make good investing decisions if you are doing it through the lens of your tribal beliefs.
Whatever those beliefs might be. Napoleon’s definition of a military genius was quote, the man who can do the average thing when everyone else around him is losing his mind. I’m gonna repeat that because it is such a ridiculously good quote. A military genius is the man who can do the average thing when everyone else around him is losing his mind.
It is the exact same in investing to be a good investor over time. You don’t need to make a lot of genius decisions. You just need to be merely average when everyone else is making bad decisions, as many people are.
One other thing that’s very different from this period, these, this tariff period that we’re going through, if you compare it to other periods of economic upheaval like Covid and Lehman Brothers and 9/11 and Pearl Harbor, is that this could end. In the next hour, right? Like the, these tariffs could be immediately removed in the next hour.
Or even if it’s not that there could be certain laws, whether it’s from the courts or from Congress, that could end these very quickly. Obviously we didn’t have that with Covid. There was no button on anyone’s desk that said, remove the virus, just click this button. We do have that now.
And so what is very different about this is how quickly it could end, and if that were to happen, how ferocious. The rally in stock markets would almost certainly be, even if there was some permanent damage, because global trading partners don’t trust us as much as they used to this, as such a unique period of economic crisis because with the flip of the switch and the stroke of the pen or a single tweet, it could all end.
And I don’t think I can’t think of another economic crisis that was similar to that. Obviously that was, there’s no analogy for that in terms of 9/11 or Pearl Harbor or whatever. The other thing I would state, maybe I’ll end with this, is that in every period of economic upheaval and political upheaval, it is so easy to underestimate the counter forces that come from it.
When things are declining, when things are getting worse in your eyes, it is easy to extrapolate and say, well, it’s gonna keep getting worse forever. It’s very difficult to envision the counter forces of. People’s reactions and lower stock market valuations that push in the other direction. It is true in every single previous bear market that those counter forces set the seeds for the next bull market, but virtually nobody saw them coming at the time.
That lower valuations plant the seeds of the next bull market, that people becoming frustrated with this political environment. Push for change. It’s always difficult to see those, but they always happen. That is happening right now at this moment. There are counter forces all over the place that are setting up the next bull market.
Now, I have no idea when that’s gonna begin. It might start tomorrow. It might start six years from now. I have no idea, but it’s always in play and it’s easy to overlook and it leaves people more pessimistic than they should be. And so as I end this rant, that will be a departure from what I normally write and speak about,
I’ll end just by saying I’m as optimistic as I’ve ever been, particularly for the long term. I’ve always talked about the idea of rational optimism, which is the idea that I am very optimistic that the world is gonna be a better, wealthier place 20, 30, 40, 50 years from now, but I’m rational in the belief that it’s gonna be very difficult between now and then.
The path between now and then will be extremely difficult. I wrote about that many years ago, and as I sit here in this unique week, unique period, maybe that’s the belief that I always come back to. Very optimistic about the long term, even if I’m understandable about how difficult it will be to get there.