Will tariffs lead to a recession?

Episode Summary

Executive Summary: The episode examines whether Trump-era tariffs could trigger a U.S. recession. Krugman says the shock is historically unprecedented and that uncertainty, not tariffs alone, is the main recessionary force. Goldman’s Jan Hatsias sees a sharp growth hit but not yet a recession base case, while Oren Kass argues the policies could ultimately spur investment and reindustrialization despite short-term pain.

Main Topics: Tariffs as an unprecedented trade shock (Priority: 5/5): Paul Krugman argues the tariff move is far larger than Smoot-Hawley relative to the economy, making it the biggest trade shock in U.S. history. Why uncertainty can cause recession (Priority: 5/5): Krugman emphasizes that the unpredictability of tariff levels and reversals discourages business investment, consumer confidence, and homebuilding, creating recession risk. Goldman Sachs growth and recession outlook (Priority: 5/5): Jan Hatsias says tariffs could cut U.S. growth sharply, with baseline growth near stall speed and recession odds close to even, but not yet enough for a base-case recession call. What a tariff-driven recession would look like (Priority: 4/5): Both Krugman and Hatsias suggest any recession would likely be moderate and concentrated in trade-exposed business investment, though consumer spending could worsen it. Policy reversals, Fed response, and market stabilization (Priority: 4/5): The guests debate whether tariff reversals can restore confidence; Hatsias says they could stabilize conditions, while Krugman says reversals may deepen uncertainty. Both discuss the Fed’s limited but real room to cut if labor markets weaken. Pro-tariff case: long-term reindustrialization (Priority: 4/5): Oren Kass argues the tariffs are part of a necessary strategic shift away from globalization, with short-term costs but potential for more domestic investment and stronger long-term outcomes.

Key Arguments: Krugman: Tariffs themselves do not normally cause recessions; the recession risk comes from extreme policy uncertainty that freezes investment decisions. Krugman: Even announced reversals may not help if markets think the policy can be reversed again, because firms still cannot plan with confidence. Hatsias: The expected tariff increase is large enough to slow U.S. growth to near zero, but Goldman’s baseline remains 0.5% GDP growth and a 45% recession probability. Hatsias: The economic hit comes from three channels: lower real income, tighter financial conditions, and delayed capital spending due to uncertainty. Hatsias: If the full tariff slate actually takes effect, Goldman would likely move to a recession base case. Hatsias: A policy-induced recession could be less severe than a financial-crisis recession because policymakers could still stabilize conditions and the Fed has room to cut rates. Kass: The tariffs are a purposeful attempt to reverse globalization’s failures and rebuild domestic production capacity; short-term costs are acceptable if they produce a better long-term structure. Kass: The main question is second-order effects, not the tariffs alone; if communications improve and firms adapt, recession is not inevitable. Kass: Higher domestic investment may reduce profits for multinationals, but that is not the same as harming the real economy. Kass: Uncertainty is overstated because many strategic outcomes still point toward investing more in U.S.-based production.

Data Points: Average tariff rate comparison: ~20% or more - Krugman says the post-tariff average rate could exceed Smoot-Hawley-era averages and rise from roughly 3% to about 20%+ Pre-tariff average tariff rate: ~3% - Krugman cites the starting point before the tariff shock Trade share of U.S. economy vs. 1930: About 3x larger - Krugman says trade is roughly three times as large a share of the U.S. economy as in 1930 Expected increase in average tariff rate: 16 percentage points - Hatsias’s forecast for the tariff increase in the average tariff rate Baseline GDP growth forecast: 0.5% (Q4/Q4) - Goldman Sachs baseline forecast under the tariff scenario Recession probability: 45% - Goldman Sachs’s current recession probability estimate Estimated hit to GDP growth: ~2 percentage points - Hatsias says tariffs reduce growth from a bit above 2% to about 0.5% U.S. economy share that is non-tradable: ~75% - Krugman notes the shock is concentrated in tradable sectors, not the entire economy Policy rate / Fed funds rate: 4.25% - Hatsias says the Fed has room to cut if the labor market deteriorates Consumer confidence decline: Biggest decline ever (as stated) - Krugman says surveys show an unusually severe drop in consumer confidence despite limited hard-data damage so far

Pivotal Quotes: "This is the biggest trade shock in history, as far as I can tell." — Paul Krugman: He is describing the scale of the tariff increase relative to historical trade shocks "The secret sauce of the Trump tariffs is that they are extremely uncertain." — Paul Krugman: He explains why tariffs may become recessionary through investment paralysis rather than price effects alone "We have a recession probability of 45 percent, so very close to 50-50." — Jan Hatsias: He summarizes Goldman Sachs’s current baseline view on recession risk

Implications: Listeners should expect weaker growth, more volatility, and likely delayed investment decisions. The biggest risk is prolonged policy uncertainty; the biggest offset is a fast, credible policy pivot that restores planning confidence.