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Thank you.

I'm Mike Redford, and this is the follow up coming up on this edition of the show, the economy and its impact on the midterms.

Affordability is at the center of almost every debate.

Who and what's to blame for rising prices at the gas pump and your groceries?

How big of a factor is the ongoing war in Iran?

And what about the impact of President Trump's tariff policies?

And what does the future hold for interest rates?

Post-election, we have two experts giving their perspective on the follow up coming up next.

But first, don't forget you can interact with a follow up on social media, our platforms, and on DeltaPublicMedia.org Oh, that's also where you can watch any of our past show this past season.

Guest tonight, good friend, Chris Douglas, Guest tonight, good friend, Chris Douglas, University of Michigan economics professor.

He's in studio with me and a new friend, Ahn Do, he is a senior analyst with Anderson Economic Group based in Lansing.

Good to see you both.

This is going to be a fun discussion.

So affordability that's the buzzword, right?

We've all heard it in the high price of gas specifically is one of the top midterm election issues in the mind of most voters, probably the top issue when it comes to affordable, particularly gas prices.

So let's start there to impact the challenges we're facing on the energy front.

So as experts, this is kind of what you live every day.

Why do you think the gas is so high?

And I know the war in Iran is a factor, but that doesn't tell the whole story.

Right?

Because even if the conflict in Iran were to end today, those prices at the pump aren't coming down anytime soon.

So who wants to kick things off, Chris?

Why are they so high?

What are other factors?

Well, I think they're high right now simply because of the war in Iran.

If you go back to last year before the war began, gas is running about 250 a gallon after the war began, $4 again, because the Iranians close the Straits of Hormuz, which every geopolitical expert knew what happened if a war touched off, I think the reason why they would say hi if the war ended tomorrow is because there would still be these issues of transit between, the Persian Gulf and the rest of the world through the Straits.

We'll start charging tolls.

Will the war kick off again?

Because we've had these false stops.

It starts in terms of ceasefires or immediately broken, which makes transportation companies are gun shy in terms of transporting through the strait.

So they have to ensure their ships.

That's very expensive to do.

You have to pay the workers a big premium to be on those ships with that danger, if the strait closes, you could be stuck on those ships for a number of weeks.

So what that means is even if the war ends tomorrow, it's going to take a long time for that, for that expectation to set in that the strait is open just like it was before February 2025.

I'm sure you could probably add to that.

And as you do, we've got some graphics to show you on the viewers about the U.S.

inflation rate, that it rose 3.7% in September and 2026, up from 3.4% in and 2026, up from 3.4% in August and 3.3% point in January 2025.

There it is on your screen.

Energy's up, as we've been talking about 20.4% over the last 12 months, with gas prices rising 34.2%, shelter up 3.2%.

You see the numbers on food.

So what we're focusing on gas prices.

We can still pick apart.

So Ahn, what's your take on this Yes I agree.

As Chris said, the one I ran is definitely the biggest driver of energy costs right now.

But I would also like to add that there are other geopolitical tensions that are happening at the same time.

So the the Russia Ukraine war is definitely, taking a big chunk out of the global supply in Russia is a, a big exporter of diesel.

Also here at home, refineries are running at a high capacity, 94 to 97%.

So even if we get the crude oil to the US, there is limited capacity for us to chain turn that crude oil into gasoline and diesel to use.

So it's interesting you mentioned Russia because just this week, as you've heard, President Trump decision to buy diesel from Russia, ignoring sanctions against them in the process, which has not been favorable on both sides of the aisle, even if it drives down the price of diesel in time for the midterms, it does not move the dial at all, does it?

Or will or will it in time, even though that's unfavorable, right?

Yes.

So it is very unlikely that the purchase of diesel from Russia would, you know, have any significant impact on diesel price because, it's just a drop in the bucket.

And so what it does is that, you know, we are, helping, you know, the finance in Russia and without positively impacting the price of diesel at home, which is adding to his unpopularity.

Right.

Which is a factor in this, this midterm, I think a big problem, you see with like this idea of buying diesel from Russia or like the the bombing in Iran has been halted, is that no one really believes this is a long term solution.

I think there's been indicators from the white House that was the midterms are over.

The war is going to kick up again in Iran.

So people have this long term expectation that the war in Iraq ending any time soon.

There's not going to be a peace treaty between Ukraine and Russia anytime soon.

Any sort of increase in supply is just going to be a one time thing, which is not going to be enough to drop prices long term.

To get a long term decrease in prices, you have to permanently solve those geopolitical conflicts, not just put the odd pause temporarily to get through an election.

So I'm going to hit this a couple more times before we move on to something else, because it's all related to affordability.

Here's a lot of Americans don't understand.

So when President Trump came back in the white House after winning his second term in 2024, not consecutively, of course, but he resumed drilling drill, baby drill, right a lot more in our country.

He also took over Venezuela, tapping into their oil resources.

He's even said that the oil shipments that have been hampered through the Straits of Hormuz because of the Iran conflict doesn't affect America that much in terms of this reserve, and oil production is coming back to America.

So the question would be President Trump, then why are gas prices so high if we're more energy dependent, all dependent we've ever been?

What's the true story here?

Right.

Sure.

Although is a global commodity.

So if you have a big disruption to the supplied, what part of the world that drives up the world price maybe an increase the supply somewhere else offsets that to a degree, but does it fully offset it in?

Another problem is, is that we do talk about all as a homogeneous commodity, but there's very different types of crude oil out there.

So for instance the crude oil Venezuela is a very heavy sour crude oil.

And that's not really what our refineries are geared to refined into gasoline.

So you can't replace Middle Eastern crude oil which is a lighter, sweeter crude oil with a heavier sour crude oil from Venezuela, without going through a long term, capital intensive process to retool those refineries for that different type of voile.

Which is why I think when the President of Venezuela was overthrown back in January of this year, you didn't see all prices immediately drop due to all this new Venezuelan oil coming online.

Okay.

Ahn, another area I want to get into, sort of this whole as you strike to the heart of President Trump's kind of shift in energy policy from what it was in the Biden era, the Green New Deal electric vehicle expansion, he's put a halt to a lot of that.

Back to the fossil fuels, combustion engines.

Do you think that's backfired?

I was going to backfire in the long run and give them what we're facing.

Is it a mistake long term, economically, not to continue moving in a direction that takes on the challenge we're facing with climate change issues?

Ahn.

I think that is a great question.

And so, so the question you're asking is long term, whether, you know, going down the fossil fuel path or electricity is going to be the optimal policy.

And, first, only I it is a hard thing to predict.

But as you said, climate change is definitely a huge, huge problem.

And so, maybe in the long run, transitioning to electricity might be the better move, for, you know, for the country.

So, Chris, you kind of an insider when it comes to what's happening to auto industry sort of economically.

And we've talked a little bit before, from one administration to a next, there's this changing policy.

Automakers then have to shift.

It's almost like three steps forward and two steps back.

And that's what we're seeing right now.

Right.

That doesn't really help us in the long run.

It has to be really frustrating for the auto companies to just see these rules change day to day, week to week, because any sort of change in Automotive production requires long term capital investment.

If you're talking about the Green New Deal on electric vehicles, that's a long term capital investment to retool auto factories, to build electric vehicles rather than internal combustion engine vehicles.

I'll see the battery plants and so forth.

But I think a big problem with the EVs that they're just never popular with consumers because of both cost and range.

If you get into EV me, you get to a 250 or 300 miles, an ideal conditions on range, or you have to charge for a couple of hours.

And that's just a source of stress that consumers just didn't want to have.

If you live in the Midwest, where you're driving quite a bit.

So even when EVs are being pushed very heavily by the federal government, they just never got a very significant part of market share.

You started seeing things like battery play in the fail even before the Trump administration.

So I think that's one issue.

And then another issue is tariffs.

And that we've had 30 plus years of free trade between Mexico, the United States and Canada.

And that expectation of free trade between those countries has led to a very integrated automotive supply chain across the US, Canada and Mexico.

So if you start slap at 50% tariffs on imported car parts from Canada, same with Mexico.

While the auto companies can't adjust on a dime to that, they're just stuck paying those higher prices.

That cuts into their profits, that feeds into higher prices for the consumer.

And you had the affordability graph on the screen a couple of minutes ago, and you see those percentage changes.

And what those are really hiding is that those are just year to year percentage changes.

is that those are just year to year percentage changes.

I think what's interesting is to look at the cumulative percentage change since Covid.

And when you look at it, it's very striking because auto prices are up by 30% compared to before Covid.

So you start slapping at 50% tariffs on top of that.

And that just makes auto prices that much.

you might be talking 60% or 70% higher auto prices compared before Covid.

So consumers who are facing these affordability issues, prices have risen faster than the wages this year might say, well, I can't afford to buy a new car this year with how high car prices are, and that really hits the auto companies of the pocketbooks.

So that's still a huge source of a point of employment in Michigan's economy.

Something like 6% of our economy is just the auto industry, right?

So if that starts to run into turbulent waters, whether the entire Michigan economy does as well, and I think we're going to see perhaps the implication of that play out of next week's midterm elections, which is why I think you're seeing Mike Rogers really backpedaled away from those Canadian tariffs, a break with the President saying, we've got to settle this trade dispute with Canada drinking beer, watching the Red wings drink it.

drinking Labatt, and watching the Red Wings.

How much more Michigan do we get than that, right?

No, that's not helpful.

He's in trouble there.

He's doing a lot of back puddling there and he's getting hit on that.

Ahn I know you want a piece of this.

The tariffs aren't you're not a big fan of those either right.

Particularly when it comes to our trade with our folks just north of the border.

Right.

So Chris raised a really good point about the integration of the North American auto supply chain.

What people might not be aware of is that a partially assembled vehicle may cross the Detroit Windsor Tunnel several times before the assembled product is sold in the final market.

And now, now, if you have a tariff at the Canadian border, it is a direct tax on the Michigan manufacturing and automotive industry and eventually attacks on the consumers.

So in 2025, Canada was our biggest trading partner, and most of that was a lot of that was due to the automotive industry.

Right.

And so, if for the wellness, for the well-being of the state economy, really these tariffs on Canadian, auto parts steel and aluminum needs to go.

So what President Trump will say is that for years, decades, we have not gotten a fair shake when it comes comes to trade in Europe, in Canada, you name it, he says.

Now it's time to pay the piper.

Now, you know, you got to take some short term suffering.

And in the long term, more American products are going to be made here.

They're going to come back to America.

He cites, you know, corporation after corporation that are coming back to America, that in time, it's driving up revenue in the long term.

Do you buy that?

Is that actually happening?

Yeah I guess two points.

First, no one ever defines what a fair deal a trade means.

Like what would fair trade look like?

That's just never defined.

Does that mean that no trade deficit with any country was just not feasible?

All the trade deficit means is people buy more goods made in one country than what those roads let's buy from us.

But trade is always balanced because if we buy a car made in Canada, the Canadians get dollars that they use to buy something from us, either a good or service, or maybe a financial asset, or maybe a piece of real assets.

So trade is always balanced.

When you talk about a trade deficit, just talk about traded one particular thing, goods.

So it doesn't make any sense to think about, well what does a fair deal trade mean.

That's why it's never defined.

And second, in terms of tariff revenue, you can look at sources of federal revenue.

Income taxes bring in just under $3 trillion a year.

The FICA payroll tax brings in maybe a couple trillion dollars a year.

The highest estimate for tariff revenue is maybe $100 billion a year.

It's I mean, you just have a bar graph of different sources of federal revenue.

Tariff revenue is not even a rounding error.

It doesn't even show up on the graph.

So this idea that we're going to balance the budget based on tariff revenue, that we'll be able to replace the income tax with tariff revenue.

It's just complete lunacy.

Smoke and mirrors.

Speaking of that, we did have a graph.

I'm not sure if we showed it or not, but if we didn't, we will.

The impact of tariffs and here it is.

Cost of tariffs to the average American households $1,745 in 2025 and $2512 and change in 2026.

That's according to the analysis by the US Congress Joint Economic Committee.

So that's the that kind of lends itself into the affordability issue again.

Right.

So we talked about the war in Iran the gas prices, cost of shelter, cost of food.

The tariffs is another one is just it's sticker shock to us.

Right.

Well yeah I mean you think about average income in America is about $80,000 per person.

It's an average.

Some people are below, some people are above, but most people are probably get like a 3% pay increase every year.

Just cost of living, which turns out to be, you know, 26, $2,700 a year, just in a 3% pay increase.

Well, that number over there that shows is like your entire pay increase gets just chewed up by tariffs, which is why Americans feel like they're not coming out.

They're not getting ahead because they're not They're not getting ahead because they're not because of affordability issues like these tariffs.

Yeah.

It could be a bloodbath for the Republicans in the midterms.

If you're looking at the polls.

Looks like the House will probably turn over the Senate.

Maybe not.

But, it's all about people getting out and vote.

And this is this is a huge issue.

So back to energy again.

Sort of another sort of pressing issue on the front has to do with these data centers and the expansion of AI data centers.

There's supposed to be the infrastructure that we're need that we need for that expansion at.

They're coming up to a lot of backlash.

Too much environmental concerns that they demand too much water, energy create too much air and noise pollution may not move the dial economically, certainly not from a jobs plan point.

So Ahn, where do you sit on on data centers?

Do we have our heads in the sand, or are we going to have to live with these because we need to expand AI and we've got to go in that direction?

So first I, I would like to talk about a little bit about the labor market in relation to these AI investment and data centers.

So, so far there has been limited evidence showing that AI is causing these massive layoffs.

However, what has changed is the, the landscape, the job landscape, especially for certain jobs that are more exposed AI and also for people who just graduated from college and are looking for a entry level position.

So, I think that when it comes to I whether it is, you know, energy, electricity, labor market, you really have to think about, the industry, the segment that you're in and also the kind of deals that the terms that the municipalities can negotiate with these developers, because AI may bring certain investments and construction jobs.

Right.

But we want to make sure that, consumers are not stuck paying for the electricity that these data centers are requiring.

So as far as the labor market overall, since you touched on that.

Do you see AI in the long term impacting jobs in our country?

You've heard the prognosticators forecasts, whatever, talk about.

They could be replacing tens of thousands of jobs in a few years.

Do either of you see that as a realistic possibility, or is that more of a scare tactic with a data center issue that we're not educated enough about as yet?

I think we're too early, the AI so-called revolution, to see if it's going to have a big impact on the labor market or not, whether if it's going to replace labor or if it's going to make certain workers more productive, which feeds into higher wages.

I think we're just too early.

The technology did know how that's going to play out.

I think the issue there's lots of issues with data centers.

They're not popular at the local level.

There's issues with perhaps noise pollution, although these have noise ordinances.

So a data center have to obey the noise ordinance just like you do.

What else would if municipalities are waving the noise ordinance for a data center?

That's another issue.

Data centers don't create a whole lot of jobs once they're built, they kind of run themselves.

You need a few workers to maintain the servers, but it's not like a car factory in the 1950s where you have just lines of people going in and coming out of the data center every shift, and probably create some construction jobs with those, a very temporary there's issues with water and electricity, although I think there's new technologies which limit how much water is evaporated off.

A lot of data centers generate their own electricity or build their own power plants, which minimizes the impact on consumer rates.

I just think an issue that is important, that doesn't get enough attention with data centers, is that a lot of these data centers get tax breaks.

Michigan tax code says that if you have like computer equipment, it's not subject to the use tax, which is a 6% tax savings.

There might be Brownfield Tax Credits.

There might be other tax abatements given at the local level to attract these.

And I think a local resident is right to say why do I have to pay property taxes with this data center doesn't?

We're talking about a multi-trillion dollar industry attracting massive capital investment, and I can't pronounce the name clod Anthropic or something like that Yeah.

Close enough.

They're going to go public and probably raise about a trillion and a half dollars on their initial public offerings.

You see, why is $1 trillion company getting vocal tax abatements?

And I think that's a very fair point.

Like the saving data center got big tax abatements.

And why are we middle class people paying taxes while these trillion dollar companies are not?

Yeah.

Good point.

A lot to be discovered and educated on that.

I'm going to segway over to the issue of interest rates.

The Fed's, as you know, raised its bench mark rate in September its first rate hike in three years after a series of rate cuts.

The President is not happy with his newly appointed fed chair, who didn't encourage the board to raise rates again given the rise of inflation.

to raise rates again given the rise of inflation.

Can you explain how all this works and why isn't probably a good idea.

Cut interest rates at this time until I guess inflation's under control.

Ahn, you want to do the economic lesson on that.

Yes.

So recently inflation has been elevated again So recently inflation has been elevated again as you have shown on the screen in headline core CPI is at 2.7%.

And sorry, headline CBS at 3.7%.

And of course CPI is at 2.6%.

And so with price levels rising and a lot of that is driven by AI capital investment.

Right.

Like the and also people have high expectations for future inflation, which could be self-fulfilling.

So the fed really is under pressure to keep prices stable by raising interest rates.

On the flip side, we have a cool labor market because in September this year, the the economy only added 29,000 jobs, which is below expectation.

So on the other hand, the fed may not may want to wait until December to see more data about the labor market before deciding on another rate hike.

Chris, I think it's important to think about how the Federal Reserve actually changes interest rates.

It's not like there's just a whiteboard where the Federal Reserve erases one interest rate of rates, a new one on their right.

The way the Federal Reserve changes interest rates is by changing the money supply.

So cutting interest rates means it increases the quantity of money which pushes the price of money, the interest rate down.

Well, if the Federal Reserve does that, well, then you get even more money chasing the goods and services of the economy, which means more inflation, which makes affordability even bigger problem.

So I don't think the President really understands how interest rates are set, because if he did, he would be pressured to the Federal Reserve to reduce interest rates because that would be causing inflation not to be maybe 3.5% might be four and a half or 5.5%.

If anything, the Federal Reserve should be increasing interest rates to bring inflation back down to 2%, which is what it was before Covid.

But inflation has the bed at 2% since at least 2020, maybe early 2021, right?

I think go ahead, keep going.

I think a big reason why the Federal Reserve is not increasing interest rates is because, well, first, there's the labor market looks okay on paper, 4.2% unemployment rate, but it's kind of a slow, higher, slow fire labor market is a lot of new college graduates know.

And I think the Federal Reserve is a little gun shy to maybe tip the labor market to a high, hire or high fire, low, hire labor market.

And then second, you look at how much interest the federal government is paying out of the debt every single year, $1 trillion more than the defense budget.

It's basically equal to what it pays for Medicare.

Just one point.

Higher interest rates would probably add about $100 billion to the annual interest cost.

And that just becomes unaffordable to the government because they don't have it extra $100 billion.

They'd have to borrow it, which is in the national debt, which increases the cost even more.

So it adds to a vicious cycle.

So I think the Federal Reserve is really kind of stuck with interest rates where they are right now, because given how big the national debt is, at some point these interest payments become unaffordable if rates go higher.

I would like to... go ahead Ahn I would like to add that also, it's a tricky situation because, how effective a rate hike is effective in containing inflation also depends at this time on how sensitive these data center AI investments are, right?

So if the developers and investors in AI, they do not respond, to the hike and they borrow to invest anyway, then, you know, a rate hike might be less effective than what the fed expects.

So I'm glad you brought that up because that's a factor in affordability, the whole national debt.

And Chris, you and I talk about this ad nauseam I think when you come on a time or two and the number stands at $40 trillion, the national debt, and it increases at roughly $355,000 per second.

So from one administration to the next, no one seems to care.

In about two minutes that we have.

Do you think the next administration will care?

And at which point, why does it matter?

At the end of the only people who care, the party is the party out of power.

So if you're the minority of Congress or the Senate, you start complaining about the national debt of voting no on the budget to take a stand.

But once you're the majority, you stop caring.

You see that the Republicans, everything I'm there in the minority versus the budget.

I think people do care.

It's just that the problem is just so massive.

No one knows what to do with.

The solutions are so politically difficult.

Someone tries to implement those solutions, they'll just really take it out of the chain.

The next election, it would have to be some sort of bipartisan deal where everyone agrees we're going to phase in these spending cuts, the tax increases, to get this thing under control.

There's just not that appetite of this political climate to do that.

The war.

Maybe we could go on forever if this big national debt like Japan has.

But the worries if if it becomes unsustainable, it's it's going to make 2008, 2009 look like an economic boom in comparison.

Ahn... any last word on that regards to the debt and affordability.

If you look at like, the government spending, right, like the top spending categories are very popular and very politically unpopular to touch.

So I agree with Chris that, you know, people do care, but it is really hard and politically maybe like invisible to for like the incumbent party to do anything about it.

Yeah, that's a shame, isn't it?

And we did not bring up the R-word recession.

That Chris and I had brought up the last year and a half, it didn't really come to pass.

It's not going to probably come to pass.

Certainly not in this calendar year.

The poly market, if you follow that, says there's 92% chance of not going to see a recession despite all of this turmoil.

So it'll be interesting.

What happens in the midterms and post midterms economically.

And I appreciate your guys expertise Ahn Do from the Anderson Economic Group.

Good work.

Senior analyst.

And Chris Douglas is always a you of economics professor.

You guys made a good team made my job easy.

Thank you very much.

It's great to be here.

And that's the follow up for this week.

But be sure to join us again next week.

Midterm Election day will finally be here.

We have two analysts giving their perspective.

Thanks for joining us this week.