The Return of Tariffs - Unpacking incidence, retaliation, and the return of protectionism
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
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53:48
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53:48
Compensating Differentials and Selective Incentives
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
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52:23
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52:23
The Baumol Effect
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
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51:26
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51:26
Favorite Models: Spence on Monopolies, Harberger on Incidence, Solow on Growth
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
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55:16
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55:16
In Praise of Commercial Culture
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
Marginal Revolution has been one of the most influential economics blogs in the world for over two decades thanks to its sharp economic analysis and thought-provoking ideas. Now, co-creators Alex Tabarrok and Tyler Cowen are bringing their nerdy winsomeness to your earbuds. Each episode features Alex and Tyler drawing on their decades of academic expertise to tackle whatever economic idea is currently tickling their noggins.
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