Episode 38
Episode summary
For decades, free trade had been touted by business leaders, economists, and policy makers as the best way for countries to exchange goods and services. But that’s all changed in the last several years, as tariffs have re-entered the conversation as an effective tool to protect American businesses. Caleb and Liz discuss the trend, what it means for small businesses, and where things go from here.
Shownotes
Jobs Report Revisions, Explained [Gustonomics Podcast]
Current Employment Statistics – CES (National) [BLS]
Recession? What Recession? [Gustonomics Podcast]
Harris and Trump Embrace Tariffs, Though Their Approaches Differ [NYT]
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Transcript
Liz Wilke (00:00:00) – Hi, I’m Liz Wilke.
Caleb Newquist (00:00:02) – I’m Caleb Newquist.
Liz Wilke (00:00:04) – And this is the Gustonomics Podcast. In each episode, we bring you a little bit of economics knowledge so you can be more informed, use the information in your business or work, or you just want a soundtrack to listen to while you browse school supply clearance to stock up on your home office.
Caleb Newquist (00:00:21) – Please remember to rate, review, and subscribe to the show or share it with an economics curious friend. Anything you can do to spread the word about the podcast is greatly appreciated. Hello, Liz.
Liz Wilke (00:00:33) – Hey, Caleb.
Caleb Newquist (00:00:36) – All right, Liz, our new little routine here on the show is that we are going to discuss some recent economics news. So what have we got for this one?
Liz Wilke (00:00:48) – Well, the biggest news that anybody has been talking about for the last week or two in my circles is the jobs reports corrections from last year.
Caleb Newquist (00:00:56) – Right. So we talked about, we did a whole episode about revisions to jobs reports. But this was like an annual revision. It was like a big, big revision, right?
Liz Wilke (00:01:08) – This is a big, big revision. And it’s different from the monthly revisions. So let’s talk about how the monthly revisions come about. And then let’s talk about how the annual revision comes about.
Caleb Newquist (00:01:18) – Let’s do it.
Liz Wilke (00:01:19) – So the monthly number is based on a survey. So people at the Bureau of Labor Statistics, the BLS, they call people on the phone, employers. They do the current employer survey, the CES. So they call employers on the phone, and they say, have you added a job? Have you let go of people, et cetera, in the last month? And so every month, they do this. And that’s how we get the monthly number. And there are revisions every month because not everybody that the BLS calls responds in the first two weeks, which is how the first number comes out.
Liz Wilke (00:01:53) – But then they maybe call back, or you get a little bit more data the following two weeks, and that goes into the monthly revision. So when you see July has a June revision, that’s where that comes from. It just means that more people from the June sample called in, gave their information, and we have a better number. The annual revision is not based on a survey. A survey is almost never as good as administrative data when you ask people how much or how many. So if you ask me what my income is, I may give you an accurate answer. I may round it.
Liz Wilke (00:02:31) – I may estimate it. I may do whatever. But I might not give you an accurate answer. But if you look at my tax returns, which is administrative data, you have a very accurate view about what my income is. And the same is true for jobs. Every single year, the Bureau of Labor Statistics looks at unemployment insurance administrative data because that is basically a complete census about how many people were on payroll, how many people were taken off payroll, how many people were added to payroll.
Liz Wilke (00:03:05) – So every year in March, they look at the payrolls data for the last year for when employers pay unemployment insurance, and that leads to a revision of the prior year’s numbers.
Caleb Newquist (00:03:17) – Okay. Thank you for that. So that revision came out, what, just over a week ago? Is that right?
Liz Wilke (00:03:26) – Just over a week ago.
Caleb Newquist (00:03:27) – Okay. And so what was that number? What did that revision look like?
Liz Wilke (00:03:33) – Yeah. So none of the background that I’ve just told you is interesting, except for the fact that the revision this year is a downward revision of 28%. It’s a huge revision historically.
Caleb Newquist (00:03:44) – Yeah, that’s big.
Liz Wilke (00:03:45) – The BLS estimated that in 2023, there were 818,000 fewer payroll jobs than they had estimated throughout the year. That is a very big decrease. It is not unprecedented, but it is a very big decrease.
Caleb Newquist (00:04:02) – Yeah. And I do remember it was the biggest revision in like 15 years. Does that sound right? It was a while. It was like 2008 or 2009 or something.
Liz Wilke (00:04:12) – 2009 was a very large revision also on the order of about 900,000 jobs. So there was a very big revision in 2009. It’s not unheard of, but it’s really, really uncommon to have a revision this big. And revisions are thought to be larger during times of economic contraction. So that’s an additional worry for people here while we’re on recession watch, right?
Caleb Newquist (00:04:34) – Yes.
Liz Wilke (00:04:34) – And as we’re sort of trying to think about soft landing possibilities. So people, I think, are both worried about the size, but also worried that the Fed kept rates up too long, and actually the economy is way slower than we thought it was based on previous data. And are we already in a recession, right? Those kinds of questions are bubbling up, which is why this number is making such news.
Caleb Newquist (00:04:56) – Okay. So this is a significant revision, but not an unprecedented one. And as you said, some people are speculating whether or not we’re already in a recession. But if the last time this happened, you said it was the 2009 data that was revised?
Liz Wilke (00:05:12) – That’s right.
Caleb Newquist (00:05:13) – Yeah. So we were in a recession around that time, or near the end of one, were we not?
Liz Wilke (00:05:19) – Yeah, according to the powers that be that determine when a recession is, and we do have an episode on what is a recession, what is not a recession, the official end of the global financial crisis recession in the United States was in June 2009.
Caleb Newquist (00:05:35) – Okay, so we’re not in uncharted territory here, but it is giving people a little bit of, you know, concern. And I guess my question now is, can we really, well, let me go back to something that we talked about in the prior episode on revisions. If this is using administrative data versus the survey data that they do for the monthly job reports, what was the leading factor in causing this revision? Is it just that the accumulation of the monthly surveys were just not very good? What are the usual suspects here?
Liz Wilke (00:06:24) – One of the big possibilities that people are looking at is, is the data that we’re using in the surveys just getting worse? People have documented, so it’s a phone survey, right? And response rates have been going down, especially since COVID to these types of surveys, right? So when response rate goes down in a survey, it means the noise or the variability is going up, and it means the precision or accuracy of the stuff you’re measuring goes down, right? And so that is a possibility.
Liz Wilke (00:06:56) – It doesn’t, it wouldn’t fully explain this particular correction, because that number has been, the response rate has been going down for some time, right? And it was accelerated during COVID. And so that can’t fully explain a change of this size. But I would also say, and it’s sort of a statistically, it’s a statistically arcane thing, but basically errors are kind of random, right? So like 30% is a big change, but it’s in the distribution of changes or corrections that you could expect, right?
Liz Wilke (00:07:34) – And so you actually should think, okay, so we, it’s almost random that the difference is as big as it is, but it’s not out of the realm of possibility. And we should not expect to change this big next year, right? Because then it would be very unlikely for us to have two changes of that size.
Caleb Newquist (00:07:53) – Big changes happen, like, or I don’t know if you call this an outlier or not. But as you’ve said in prior episodes, things revert to the mean. In other words, what goes down must come up, or what goes up must come down, right? Like that’s inevitable in these kinds of things. So it just feels like that this is maybe a low point in terms of, it’s been 15 years since we’ve had one this large.
Caleb Newquist (00:08:17) – So the ebbs and flows of it, this just seems to be a low ebb, and it’s realistic to assume that next year will not be this low, it would be, it’s highly unlikely that it would be this low. Is that fair to say?
Liz Wilke (00:08:29) – Yeah, I think that’s fair to say. So like an example that’s maybe a little closer to home is when you were a student, or maybe your kid is a student, and they’re a B student, right, on average over the long term. And anytime they take a test, they could get somewhere between an 89 and a 94, right, is like their sort of standard range. But maybe one day they come home with a 99 or 100, right, on a test. And it’s, you shouldn’t expect that your kid is going to score 99 or 100 on future tests, right?
Liz Wilke (00:09:04) – You should think that they’re going to go back to their B average, basically, right? And so it’s not like it was a mistake on the teacher’s part, or like some, your kid just got super smart, right, for the single day of the test. It’s just like sometimes these things happen, and we should expect, but we should expect the long-run average, right, like the long-run average, long-run average, average, average.
Caleb Newquist (00:09:25) – If I understand it right, there is chatter now about whether we’re all wasting our time looking at BLS numbers. Is that something that is on the fringes of the conversations or is this something that, like serious people like yourself are talking about or thinking about?
Liz Wilke (00:09:41) – I don’t think the question in my circles is: should we even pay attention to the BLS, although I want to be sensitive to the fact that I have heard that question from lots of people. Right, people are having it and in some sense it sort of speaks to the reputation that the BLS is built up over a long history of doing a pretty darn good job. Right of producing these statistics. Yeah, because we now expect a level of precision, right, that that isn’t, that isn’t always there. I think the question is: how can we do better, right?
Liz Wilke (00:10:13) – How can we identify some of these gaps? But also, are there other sources of data right that we could be looking to that would, in addition to the BLS number, right, maybe give us a better sense of where things are going. You know Gusto has hiring and termination rates. ADP puts out a regular jobs number.
Liz Wilke (00:10:32) – You know we both operate on payroll administrative data, so that’s one possibility, but I think the question isn’t: why even care about the BLS. The question is, how can we get a better picture given what we know about, like how these numbers can be wrong? And I will say all numbers are wrong. Yes, right, all all numbers in this space are wrong. The question is, how wrong are they? Does it matter for our decision-making process and how can we do? How can we combine, write multiple perspectives to get a better picture overall?
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Caleb Newquist (00:11:40) – Okay, Liz, for our main topic in this episode, we’re gonna talk about something that is gotten a lot of airtime in political news, but we’re not gonna get political on this show because people don’t want us to get political. We want to keep our jobs. No, we are gonna talk about tariffs. Now, tariffs until, I would say, what about eight, nine years ago? Tariffs were kind of like this thing that people really didn’t talk about very much. But over the last eight, nine years they’ve become, I guess, more popular as as a talking point in trade policy.
Caleb Newquist (00:12:28) – And so my question for you- let’s just to get started- is, for the people who don’t know: What is a tariff?
Liz Wilke (00:12:38) – All right, a tariff is a tax on on an imported thing period. So a tariff is honestly a non-necessary name that we give to a tax on something you import.
Caleb Newquist (00:12:52) – If I go to my local wine shop and I buy French wine, but that wine came from France, and if we had a tariff on French wines, we would tack on a little tax to that wine and that would probably get passed along to me as the consumer who ultimately buys that wine.
Liz Wilke (00:13:12) – Yeah, I mean you. You can definitely get people who want to sort of quibble about is it a tariff or an import tax or a duty right, but like basically any wedge that you put on an imported good right that raises its price that a domestic person pays they, that’s a. That’s a that qualifies in sort of the broad category of tariff. Okay, we’re talking about tariffs, a couple of reasons.
Liz Wilke (00:13:38) – One: yes, the Trump administration imposed a bunch of tariffs- pretty steep ones actually- on a bunch of Chinese goods, and so tariffs can be applied to anybody, but they’re often applied to specific products from specific places, right, and so in that way, they’re often different from, like, import taxes or duties, which are usually just applied across the board. And the Biden administration increased some of those tariffs, and the US trade representative is about to finalize the rules about those import tariffs.
Liz Wilke (00:14:13) – So the US has been increasing tariffs, especially on specific sort of strategic Chinese goods, as part of escalating economic competition and a response to what they think are unfair trade practices on part of the Chinese.
Caleb Newquist (00:14:30) – Right because prior to 2015, 2016 right because prior to 2015-2016, tariffs were dormant, is that fair to say? Like they just, like free trade was the big popular economic position, was that free trade was good, everybody benefits, and free trade is what the policy, what the trade policy should be for every country.
Liz Wilke (00:14:54) – Yeah, I think the, I mean, tariffs have existed for a really long time, but I think they were sort of thought of as a thing of the past, right? A thing that we used to do and a thing that we don’t really do anymore because we want to encourage free and open trade and to be a good partner, you have to be a good partner, right?
Caleb Newquist (00:15:13) – Right.
Liz Wilke (00:15:14) – But tariffs have made a comeback. And in fact, both current presidential candidates have plans in place, right, for tariffs of one kind or another. So it’s still a live issue, even as we’ve just had these sort of two tariff hikes on Chinese goods.
Caleb Newquist (00:15:30) – Yeah, so it’s become a political football in this election cycle. So, but as I said, we’re not gonna get into the politics, but I am gonna get into the economics of it. So Liz, like do economists, what opinions do economists hold about tariffs? Are they good, are they bad, are they indifferent? What’s, where do people fall?
Liz Wilke (00:15:54) – Well, Caleb, no economists are in unanimous agreement about anything that I know of, including simple things like what is money. But I think I would actually disagree that we can’t talk about, that we can talk about tariffs in a non-political way. And I’m gonna try and unpack that a little bit. So tariffs are fundamentally a political tool, right? Often in most cases, there are sort of like three big reasons, maybe four, that you use a tariff. One is protectionism.
Liz Wilke (00:16:32) – You just want to protect your domestic industry and your domestic people in a specific area. And so you want to make it, all the foreign goods more expensive so that you can have, your people can have an advantage. During the Great Depression, in the period between World Wars I and II, U.S. farmers were experiencing real significant price declines for corn and wheat and their goods because the European farmers were coming back online after World War I, and because a lot of cereal production was starting to expand outside of Europe.
Liz Wilke (00:17:10) – And so that was depressing world prices, and American farmers were really taking a hit as a result. And so the U.S. administration said, okay, we’re just gonna make foreign wheat and corn and all that more expensive so that American farmers can get a better price domestically, right? It was about protecting American farmers sort of at the expense of free trade, right? So they impose this tariff.
Liz Wilke (00:17:37) – You can also impose a tariff because you think it levels the playing field, because you think that a trading partner is engaging in unfair practices that are undercutting the competitiveness, right, of your own industries, which is a little bit protectionist, but actually it’s not just like, I wanna protect my own industry or grow it to be competitive. It’s like, you’re doing something bad that’s not fair, right, in the system. And so you basically impose a tariff to level the playing field to what you think is fair.
Caleb Newquist (00:18:12) – Gotcha, okay. So I’m sure as like in all things in economics, people have a wide range of opinions about things and tariffs are no different. So Liz, is there a prevailing opinion about tariffs among economists?
Liz Wilke (00:18:31) – Yeah, so there’s two prevailing opinions. One is that pretty much most economists are agreed that tariffs are distorting, that they create inefficiencies, that they create inefficiencies, that they sort of drive wedges between like the functioning of markets, but whether or not that matters in any meaningful sense, like whether or not it creates a big distortion or hurts certain types of people or sort of creates big or small economic impacts is up for debate and it depends a lot on how the tariffs are defined.
Liz Wilke (00:19:00) – But the impacts come from three, what I’m gonna call three basic truths about tariffs, right? The first truth about a tariff imposed by the US on someone else is that Americans pay it.
Liz Wilke (00:19:16) – This is an important one because it’s easy to talk about other countries being hurt by tariffs, right? or having to pay the cost of a tariff, but if a car has a tariff on it and it comes into the United States and it costs 25% there’s a 25% tariff on that car. An American business, an American importer, or an American buyer pays that 25% tariff, right? The foreign car manufacturer doesn’t pay it. An American pays it. So I want to be very clear about that because we always think that tariffs are paid by other people.
Liz Wilke (00:19:52) – Tariffs are paid by the people that impose them.
Caleb Newquist (00:19:55) – Right.
Liz Wilke (00:19:56) – So whether or not that’s like a big deal or a little deal sort of depends on how big the tariff is, you know, how much the people paying the tariff can can absorb the cost of the tariff, right? And if there are good alternatives, etc. The second truth about tariffs is that tariffs protect some jobs and some industries and they cost others. Right. So an example is if I impose a tariff on steel from other places, some steel workers jobs benefit, right?
Liz Wilke (00:20:33) – But the people that are using steel as an input, right, maybe for other types of manufacturing or construction or what have you are facing these higher costs now and their industry will suffer because their input became more expensive, right? And whether or not that’s like a net gain or a net loss also depends on a lot of factors, but tariffs protect some jobs in some industries and they usually hurt other jobs in under industries. It’s not even like at home a win-win for everybody, right, to have a tariff. So there’s this balance here.
Caleb Newquist (00:21:07) – So like you said, say you’ve got to buy copper to as part of building a building and you’re getting copper from outside the U.S. and you are ultimately the copper itself, maybe that means that the copper from outside the U.S. is now the same price as the copper that comes from within the U.S., but the person that’s buying that copper is going to have to pay a higher price one way or another, whether they buy the foreign copper or the domestic copper.
Liz Wilke (00:21:41) – Yeah, that’s right.
Caleb Newquist (00:21:43) – Okay. Yeah, that’s not good. That’s not good.
Liz Wilke (00:21:46) – Well, if you’re the person buying the copper, it’s not good. And if you’re a U.S. copper producer, it’s good for you, right?
Caleb Newquist (00:21:52) – Yes, right. Okay.
Liz Wilke (00:21:53) – Which is again, it’s hard for me to say that, I mean, tariffs are political by their nature. You basically are deciding when you put a tariff in who is going to benefit, right? Who do I want to benefit and sort of by extension implicitly, like who is going to pay the cost, right? And so somebody pays the cost.
Caleb Newquist (00:22:13) – Right.
Liz Wilke (00:22:13) – And then the third truth about tariffs is that if you can do it to me, I can do it to you.
Caleb Newquist (00:22:20) – Yeah.
Liz Wilke (00:22:21) – Right?
Caleb Newquist (00:22:22) – And so there are plenty of backsies. There are plenty of backsies to go around when it comes to tariffs. That’s what you’re saying.
Liz Wilke (00:22:28) – The international trading environment is not wholly unlike an elementary school playground where you hit me and I hit you back and we are actually seeing that right now play out right with the U.S. tariffs on China. China is responding in kind with right tariffs on U.S. goods. And so again, this is sort of political. It’s not like we can just impose the tariffs that we want on others goods and others will say, oh, that’s a shame for us. We’ll, you know, we’ll do the best we can. Right. There is a there is a retaliatory game here.
Caleb Newquist (00:23:04) – Right. And so these are the trade wars that we hear about in the news sometimes as something that as the tariffs escalate, the tit for tat that happens, those are the trade wars that we hear about.
Liz Wilke (00:23:20) – Yeah.
Caleb Newquist (00:23:21) – Yeah.
Liz Wilke (00:23:21) – So then so then you think, right, all of these seem like sort of bad things, right? Or not ambiguously good things or sorry, not unambiguously good things.
Caleb Newquist (00:23:28) – Is it? Yeah.
Caleb Newquist (00:23:29) – Does it seem is it is it too far to say they seem kind of petty?
Liz Wilke (00:23:34) – Yes, it would be too far. There are so so and now now now let me talk about so I’ve said three truths about tariffs which sort of make tariffs seem like not that great.
Caleb Newquist (00:23:43) – Okay.
Liz Wilke (00:23:44) – But but there are lots of things that we do in society that are like economically inefficient because we think that they further like long term goals that we care about or because we think the tradeoffs are worth it. So why have tariffs at all? So you can have tariffs just to protect certain industries, right? I I really care about U.S. farmers and they’re having a hard time. And so I’m going to put in a tariff on foreign wheat or foreign corn just to help them. Right.
Liz Wilke (00:24:15) – You can put in a tariff because you think that one of your trading partners is being really unfair and not a good player in the space, right, that they are subsidizing the export of a competitive good and that is really just like not fair level playing field. And so you want to you want to impose a tariff to make it more fair for your domestic producers.
Liz Wilke (00:24:36) – You can impose a tariff because you have an infant industry. You have a developing industry that you want to support. So the US has just passed the CHIPS Act, where US wants to produce its own semiconductors, its own solar cells, its own electric vehicles, et cetera, and to sort of build its sufficiency here. And it’s not probably a coincidence that those are also things that have tariffs on them now from Chinese import.
Liz Wilke (00:25:09) – So one of the reasons to raise a tariff is to make foreign competition more expensive so that while your industry is getting up and running for your long-term strategic goals of supply independence, you are sort of protecting it. And then you think you’ll open it up to more competition over time when it’s strong enough to do so. And then you can also, I think the sort of last big political reason is you could decide that you don’t want your trading partners to have as much geopolitical power as they do.
Liz Wilke (00:25:44) – You could just say, I think that this trading partner has too much power in the global sphere, and we’re going to take a hit now so that we can manage those relationships. And that’s, I think, part also of the renegotiation. So I think we’ve been thinking more about tariffs as the relationships between the US and China have become a little more competitive. And they’re thinking about how to position themselves right on the global stage relative to each other.
Caleb Newquist (00:26:18) – OK. So here’s the question that we always ask at the end of the show. How should small businesses and advisors to small businesses, how should they? Because tariffs are in the news a lot. Because they’re complicated, and they’re political, and they’re international in scope. And so they get a lot of attention. So for a regular business, should they worry about tariffs? I guess it depends on whether or not they import. If imports are part of their business or not, right?
Liz Wilke (00:26:58) – It depends a lot on if imports are part of their business or not. So what I would tell a small business owner is, think not about the headline about a tariff. Think about the line item tariff that is being imposed and how and whether it affects you. So a tariff on electric vehicles probably doesn’t affect you unless you are in that supply chain, right?
Caleb Newquist (00:27:29) – Right.
Liz Wilke (00:27:30) – And a tariff on steel, if you are a manufacturer, may very well affect you, right? And then so I think if you are a small business, or you supply to a larger business, or you’re part of this global supply chain, you know where all your stuff comes from. The thing to do is to keep, is when you see a headline for a tariff increase, read the article for the things that will have tariffs imposed on them, right?
Liz Wilke (00:27:59) – Because you can either sort of not worry and save your precious time and go back to running your business, or you need to call a representative, or you need to sort of get through your local action group, your chamber of commerce, however it is you make your voice heard as a small business owner. Pay attention to the details here because the details matter for their impacts on you and your business.
Caleb Newquist (00:28:21) – Excellent. That’s it for this episode. We hope you learned something new and useful for yourself and your business. Tariffs are complicated. That’s what I learned. Please let us know what you think of the podcast by leaving a review, or share it with a friend or colleague who might enjoy it. I’m Caleb Newquist.
Liz Wilke (00:28:37) – I’m Liz Wilkie. Thanks for listening.
Caleb Newquist (00:28:41) – The Gustonomics Podcast is made possible by Gusto, the people platform for over 300,000 businesses across America. If you’ve started a business and are ready to hire your first employee, or just looking for an easier way to run payroll, visit gusto.com slash podcast to learn more. That’s gusto.com slash podcast.