The Return of Tariffs - Unpacking incidence, retaliation, and the return of protectionism

Can America afford $30 trillion in debt—or is the real question whether it wants to? In the final episode of Season 2, Alex and Tyler take on the growing mountain of federal debt—now equal to 100% of GDP, with interest payments alone rivaling national defense spending. Alex lays out the case for concern: rising obligations, off-balance-sheet liabilities for Social Security and Medicare, and a political system with no appetite for hard choices. Tyler pushes back, arguing that markets remain calm, real borrowing costs are near zero, and America's wealth-to-debt ratio tells a far less alarming story. From the relevance of the R versus G framework to the lessons of Japan's sovereign wealth strategy, they debate whether the real risk is insolvency or illiquidity, and whether solutions will come through growth, inflation, financial repression, or some mix of all three. Along the way, they explore how AI could reshape the fiscal picture—raising welfare more than wealth, extending lifespans while straining budgets, and changing what kinds of income governments can actually tax.  Transcript: https://www.mercatus.org/marginal-revolution-podcast/americas-debt-crisis-or-calm Follow Alex, Tyler, and Mercatus https://x.com/ATabarrok https://x.com/tylercowen https://x.com/mercatus https://marginalrevolution.com/ https://www.mercatus.org/ Timestamps 00:00:00 - Should We Be Worried About the US Debt? 00:08:19 - R vs. G? It's the Political Economy, Stupid 00:16:52 - The Five Ways Out 00:22:21 - AI's Fiscal Paradox 00:30:44 - The Hidden Sovereign Wealth Fund 00:34:56 - The Bottom Line

In this episode, Alex and Tyler tackle the resurgence of tariffs in American policy, a development neither saw coming after decades of trade liberalization. They unpack the economics of who really pays when tariffs jump from 2.4% to 18% in a matter of weeks, exploring everything from tax incidence and exchange rate adjustments to the question of why we treat tariffs so differently from currency depreciation. Along the way, they debate Tyler's new "soft" arguments against tariffs (including contagion effects and rising correlations), examine whether Lerner symmetry still holds in a world of T-bills and exorbitant privilege, and consider the Trumpian case for investment over trade. From soybeans and pharmaceuticals to AI data centers in outer space, they trace how tariff policy affects everything from American landowners to Canadian defense spending.  Tyler arrives ready to confuse and Alex ready to clarify, but by the end they agree on one thing: we've muddled ourselves into something quite bad. Link to transcript: https://www.mercatus.org/marginal-revolution-podcast/return-tariffs Follow Alex, Tyler, and Mercatus https://x.com/ATabarrok https://x.com/tylercowen https://x.com/mercatus https://marginalrevolution.com/ https://www.mercatus.org/ Timestamps 00:00:00 - The return of tariffs  00:02:44 - The threat of contagion 00:04:14 - Who really pays for tariffs 00:16:39 - Exchange rates muddle the picture 00:20:40 - Are tariffs making bad things more correlated? 00:22:53 - Does Lerner Symmetry hold? 00:29:56 - Differences between dollar depreciation and tariffs 00:33:13 - Retaliation  00:34:28 - Tariffs as a Georgist tax on land rents 00:38:10 - How the US economy will adjust  00:49:42 - The bottom line

Why do butchers earn more than bakers even though they're typically less educated? What does Uber driver data reveal about wage gaps? In part three of their series on favorite models, Tyler and Alex explore compensating differentials, Adam Smith's insight that wages adjust for a job's pleasantness, safety, and flexibility. But Tyler pushes back: in a world of increasing returns and clustering talent, are we moving toward winner-take-all dynamics where all good things come together instead of trading off? Then they turn to Mancur Olson's theory of selective incentives. How do small groups organize to lobby for benefits while big groups struggle? And as markets become more competitive and surveillance more pervasive, are the village chieftains who once solved collective action problems disappearing from economic life, or reemerging in a different form? Transcript: https://www.mercatus.org/marginal-revolution-podcast/compensating-differentials-and-selective-incentives Follow Alex, Tyler, and Mercatus https://x.com/ATabarrok https://x.com/tylercowen https://x.com/mercatus https://marginalrevolution.com/ https://www.mercatus.org/ Timestamps 00:00:35 - Compensating differentials overview  00:04:48 - Segmentation vs. Differentials 00:13:02 - Amenities and the gender pay gap  00:22:07 - Two Competing Theories    00:24:26 - How fixed costs complicate the picture 00:29:02 - There are many margins of adjustment! 00:31:39 - Mancur Olson and selective incentives 00:38:02 - Special interests or bad voters? 00:41:50 - The Waxing and waning of selective incentives  00:48:22 - Alternatives to Selective Incentives

Why are college tuition, healthcare, and car repairs eating up bigger shares of our budgets? Alex says it's all about the Baumol effect, a deep economic insight about relative prices that explains why labor-intensive services inevitably become more expensive over time. Tyler isn't buying it. He thinks the Baumol effect is often invoked as an ex-post explanation but can't make predictions. Further, there's not enough Kelvin Lancaster in Baumol, Tyler argues—not enough attention to bundle of characteristics that define what a good really is. In this episode, Alex and Tyler debate whether the Baumol effect is profound or overstated. They wrestle with examples ranging from haircuts in India to doggy daycare in Northern Virginia to Soviet-era ballet prices, touching on what poor countries can teach us about service costs and whether we're headed toward a future of AI tutors and robot mechanics. They also explore Staffan Linder's theory of the "harried leisure class"—the idea that as we get richer, we try to squeeze more utility into less time, making even our leisure more goods-intensive and rushed. Link to transcript: https://www.mercatus.org/marginal-revolution-podcast/baumol-effect Follow Alex, Tyler, and Mercatus https://x.com/ATabarrok https://x.com/tylercowen https://x.com/mercatus https://marginalrevolution.com/ https://www.mercatus.org/ Timestamps 00:00 Introduction 00:34 Baumol effect overview 03:28 Critique of Baumol and whether it applies to higher education 09:06 Product quality, Lancastrian bundles, and replacement as repair 15:45 Music industry productivity growth 18:52 Rising healthcare costs: Baumol or improved quality? 22:39 Why haircuts are cheap in India 30:44 The difficulty in predicting productivity gains 34:47 Childcare as a clear example of the Baumol effect 37:26 Are repairs getting cheaper or more expensive? 47:18 The Staffan Linder effect

Alex and Tyler put three classic models through their paces. Alex starts with Spence on how a monopolist chooses quality and applies it to how the New York Times' paywall flipped its audience incentives. Tyler pushes back, arguing that network effects and loyalists matter more than marginal customers. They move to Harberger on tax incidence and the hidden winners and losers of corporate taxes, minimum wages, and congestion pricing. Finally, Solow's growth model frames a conversation on why some countries catch up and others stall, including what it gets right about China, and what it misses. Together, their debate shows why the best models keep earning their place—not because they're perfect, but because they still shape how we think even when they're wrong. Transcript: https://www.mercatus.org/marginal-revolution-podcast/favorite-models-spence-monopolies-harberger-incidence-solow-growth Follow Alex, Tyler, and Mercatus https://x.com/ATabarrok https://x.com/tylercowen https://x.com/mercatus https://marginalrevolution.com/ Timestamps: 00:00 Intro 00:19 Spence's monopoly model 07:08 How Spence applies to NYT and HBO 16:13 Alex and Tyler's approach to writing a textbook 20:43 Harberger's model of who pays tax 24:44 Harberger's model as applied to congestion and minimum wages 33:54 Solow's growth model 42:22 What Solow's model misses

Tyler and Alex revisit Tyler's 1998 book and trace how commerce disciplines and amplifies creativity. Great artists bargained hard because money buys orchestras and time. "Inspired consumption" means high-quality audiences shape better art. Dynamic, Hayekian competition discovers new genres, while pulp cross-subsidizes the sublime. They disentangle when government support works, why TV improved with entry and subscriptions, how "payola" rhymes with supermarket slotting fees and with Spotify's algorithmic era, and why some modern art maligned as minimal is, in fact, marvelous. Along the way they touch on reading's spiky renaissance, textiles as the smartest undervalued collectible, the real story on brutalism (is the DC Metro overrated?), and a sober take on cultural pessimism's recurring illusions—plus what all this implies for AI-era culture. Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/praise-commercial-culture Stay connected: Follow Alex on X: https://x.com/ATabarrok Follow Tyler on X: https://x.com/tylercowen See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/ Chapters 0:00:00 Why Alex loves the book 00:02:05 The challenge of getting it published 00:04:10 Mozart was motivated by money 00:06:40 Great audiences create great art 00:08:25 Economics of the avant-garde 00:13:39 Good and bad government art funding 00:17:22 Golden era TV 00:20:20 Book publishing and reading 00:26:43 Competition as a dynamic discovery process 00:32:14 The value of modern art and architecture 00:38:53 Payola got a bad rap 00:42:10 Spotify streaming economics 00:46:41 Why cultural pessimism pervades Recorded 1/13/2025

In the final episode of Season 1, Alex and Tyler explore one of the most consequential quests in the history of economics and finance: the decades-long search for a formula to price options. From Louis Bachelier's groundbreaking work in 1900 to the eventual triumph of Black, Scholes, and Merton in the 1970s, they trace how brilliant minds across mathematics, physics, and economics gradually unlocked the how to properly price financial instruments like calls and puts. Along the way, they examine how this theoretical breakthrough revolutionized modern markets, sparked the creation of the Chicago Board Options Exchange, and transformed our understanding of uncertainty and risk management. The conversation ranges from the hidden histories of early options traders to how options theory now shapes everything from portfolio insurance to oil well investments to mega-sized chip plants. They close by reflecting on how options theory has become fundamental to modern decision-making far beyond trading floors, revolutionizing how we think about and manage uncertainty across the entire economy. Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/quest-price-options Stay connected: Follow Alex on X: https://x.com/ATabarrok Follow Tyler on X: https://x.com/tylercowen See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/ Chapters 00:00 - The puzzle of pricing options 03:46 - Louis Bachelier's contribution 09:52 - Enter Paul Samuelson 15:05 - Black, Scholes, and Merton 27:05 - Kassouf, Thorp, and cashing in on options theory 32:28 - Other applications of options pricing theory Recorded 4/12/2024

In this exploration of the "new monetary economics," Alex and Tyler revisit the ideas of thinkers like Fischer Black, Eugene Fama, and Robert Hall, whose bold views about the Fed and the money supply once seemed detached from reality but now increasingly describe the financial world we inhabit. They explore why traditional measures like the money supply are becoming obsolete, how crypto and stablecoins are reshaping monetary systems, and why AI might emerge as a major consumer—and creator—of cryptocurrencies. They also discuss the paradox of pegged currencies, the lessons of algorithmic stablecoin failures like Terra, and the surprising connections between fiscal and monetary policy in a world of increasingly liquid assets. Finally, they reflect on how the unconventional ideas of new monetary economics, once dismissed as fringe, are now critical for understanding our modern financial landscape. Recorded March 14, 2024 Transcript, video, and links:  https://www.mercatus.org/marginal-revolution-podcast/new-monetary-economics Chapters 00:00 - Outlining the ideas of new monetary economics 09:03 - The difficulty of defining the money supply 17:36 - What determines the inflation rate? 22:32 - Crypto's role in validating new monetary economics 26:02 - The role of the Fed in a Modigliani-Miller world 32:09 - Stablecoins and the paradox of pegs 46:11 - The bottom line Stay connected: Follow Alex on X: https://x.com/ATabarrok Follow Tyler on X: https://x.com/tylercowen See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/

In this episode, Alex and Tyler dive deep into the fascinating and often misunderstood world of insurance, exploring how this trillion-dollar industry underpins modern economies while shaping human behavior in surprising ways. From its ancient roots in maritime adventures to the revolutionary development of life insurance, they unravel the economic logic and social norms that made this market possible. Along the way, they grapple with enduring puzzles: Why do people insure against some risks but not others? Why did life insurance once seem repugnant, only to become a moral imperative? How has the industry's ability to manage moral hazard and agency problems evolved—or not? From mutual aid in Indian villages to the legacy of 17th-century tontines, the conversation illuminates the ways in which insurance reflects both the limits of human foresight and our relentless attempts to navigate an uncertain world. Recorded March 14, 2024 Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/economics-insurance  Stay connected: Follow Alex on X: https://x.com/ATabarrok  Follow Tyler on X: https://x.com/tylercowen  See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/ Chapters  00:00 - The size and benefits of the insurance industry  02:35 - Insurance as a transaction enabler 10:13 - Nicholas Barbon, Robin Hanson, and insurance bundling 18:22 - The effect of advances in mathematics on insurance 23:45 -Tradable insurance as an early prediction market  32:54 - Risks we don't insure against 37:12 - Charles Ives and changing social attitudes around life insurance 41:33 - Will repugnance fade for paid organ donations as it did for life insurance? 45:31 - Have the agency problems behind insurance been fully solved? 54:44 Good books on insurance and takeaways

In this final installment of their series on the 1970s, Alex and Tyler turn to the social upheaval and crime wave that marked the decade as one of America's most turbulent. They explore how rising crime rates transformed cities, fueled a national sense of fear, and led to far-reaching policy shifts, including mass incarceration and changes in urban policing. From the shocking statistics on homicide and stranger violence to the rise of serial killers and political bombings, they consider how the era's unprecedented violence influenced American culture and policy. The conversation concludes with a caution against complacency, as they reflect on how fragile today's low-crime environment may be—and what lessons from the past should guide us in preserving it. Recorded July 17, 2024 Transcript, video, and links: https://www.mercatus.org/marginal-revolution-podcast/1970s-crime-wave Stay connected: Follow Alex on X: https://x.com/ATabarrok Follow Tyler on X: https://x.com/tylercowen See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/