The New York Federal Reserve claims 90% of the tariff burden is being shouldered by US firms and consumers, but the White House disagrees. Joining us now, White House National Economic Council Director Kevin Hassett. This will be a continuation of a discussion we had yesterday with our trade representative Jameson Greer. And we talked about whether something's regressive. But we'll try to get into all of this.
We saw an inflation number last week, 2.4%. If it is being shouldered by US firms and consumers, US firms are eating some of it or consumers are, it's being offset by something else, whether it's lower gas prices or something else, because just in the numbers themselves, that doesn't hold water, right?
Yeah. I mean, the paper is an embarrassment. It's, I think, the worst paper I've ever seen in the history of the Federal Reserve system. The people associated with this paper should presumably be disciplined. Because what they've done is they've put out a conclusion which has created a lot of news that's highly partisan based on analysis that wouldn't be accepted in a first semester econ class. The bottom line is that if you're wondering who bears the burden of a tariff, then you remember, Joe, you got supply curves, demand curves, you shift them around, you got consumer surplus, you got producer surplus, and then you look and see how it all works out in the end. And they're basically only looking at changes in prices. So they're assuming that quantities don't move at all. But guess what? Quantities did move. So the basic theory of President Trump's tariffs is that sure, we're importing stuff from China, but we got producers in the US that make the same stuff maybe at a slightly higher price. If we bring the stuff home, create the demand at home, then that will hurt China and drive up wages in the US and American consumers will be better off. So what have we seen? Prices have gone down. Inflation is down over time. Import prices dropped a lot in the first half of the year and then leveled off and real wages were up $1,400 on average last year which means that consumers were made better off by the tariffs. And so consumers couldn't have been made better off by the tariffs if this New York Fed analysis was correct. It's really just an embarrassment. I can't imagine who signed off on it, frankly. But in the best case scenario, it's something in the middle that maybe there are some exporters that have to cut prices and therefore it lessens the impact of some of the tariffs. But there are certainly importers in this country that are paying some of the tariffs.
And I'm not saying my discussion yesterday was normally Democrats would be fine with corporations in this country somehow providing revenues to the US government to be used to reduce the deficit, which is what is happening with some of these tariff revenues. But then we get to the sticky point about whether when it hits consumers whether it's regressive. And that's where Jameson Greer made the point that a lot of consumption is skewed to the high end. And it's not necessarily going to affect low end, but it does affect low-end people because it's less services. It's things like food and other things that they have to have and as a percentage of their income, it probably hurts them more than some of the high-end consumers. Is it not regressive of the tariffs?
You know, because if they'll concede to you that taxes, yeah, let's raise taxes through tariffs if that's what it is. But don't what we've been doing is by congressional district. We've been looking at how much more money people have to spend because they're buying the normal bundle of goods that they need to survive and how much money people have gained in the last year because incomes have gone up because of all of our great policies which are causing a business boom. And almost without exception when you go look at it, incomes are up way more than the cost of living. And that's the real wage gain that this silly Fed study neglects to mention. And so the bottom line is that Trump policies are meant to onshore production and create jobs. And those jobs that we're creating are not for, you know, Jeff Bezos, they're for the people who didn't have a job before. And so they're by definition the people at the bottom. And our policies are working. They're very clearly working in the data there.
I guess at the very least, would you concede that there are global imbalances being addressed by the tariffs? That's one of the rationale for why the president put them in. But there are some negative ramifications for what happens in the United States. Can I mean at least you'd concede that well there will be anecdotes, for example there'll be a company that pressure that comes from China, some price pressure. There was an article yesterday, not all the articles are wrong, that criticized what's happening with tariffs. I mean some of these companies do plan to raise prices in response to some of the tariffs which makes inflation harder to get down to 2%.
Right. Right. But it's interesting, right, that everybody said that with these large tariffs that we'd have runaway inflation and stagflation. And as you rightly point out, we've had, you know, very strong economic growth and inflation going closer and closer to the target. And now, it is true that we're seeing news stories that people say, well, we've held off on raising prices because of the tariffs, but we're going to have to. Now, I guess the question is, is everybody going to do that or are some people going to do that? And the people who do that, are they going to lose customers to the folks who don't? That's what happened last year. I expect that's what's going to happen this year, too.
Right. Hey, Kevin, when you do your own modeling of just how the economy will look over the next 12 months, how do you model whatever you think the AI implications are into all of this?
Sure. You know what I like to do is I like to start out with a guesstimate of aggregate supply and then a guesstimate of aggregate demand and then see how they go. And so on the aggregate supply side, I think we're growing at about 3% productivity. I think we're maybe getting one, one and a half percent out of capital stock growth, the new factories, and maybe half a percent or so out of workers and workers being more productive. And so that gets you aggregate supply to sort of five, which is a really, really strong aggregate supply number. I think aggregate demand is probably running, given what government's doing, you know, maybe around seven. And so I think that we are probably looking at a 2% inflation at 5% growth, something like that. But you know, we'll wait and see. It's really early in the year but generally speaking the productivity gains that we've seen have been very consistent. They've been in the threes and we have productivity growing in the threes. It's really hard not to have GDP growth that's north of four.
