“Economics is tougher than physics because the ‘particles’ we study have minds of their own.” JIM Bullard, Purdue University economics professor
The UCSB Economic Forecast Project’s 2025 South County Economic Summit, held at Santa Barbara’s Granada Theatre on May 12, was a great success.
After welcoming remarks from EFP board chairman Ed Edick and UC Santa Barbara Chancellor Henry Yang, EFP director and UCSB economics professor Peter Rupert quickly got the show started with an impressive lineup of economists.
The quote above was a great reminder of the challenges of economics. Unlike atomic particles that follow set behaviors, human beings have a funny way of making up their own minds about how to react to change.
George Alessandria, an economics professor at the University of Rochester, talked about trade policy, a hot topic with all the recent tariff news.
He opened his remarks by saying “here’s what we know about the tariffs as of today” — and showed a blank PowerPoint slide. Who says economists don’t have a good sense of humor!
Consistent with many economists, Alessandria noted that short-term tariffs used to negotiate better trade terms could work fine, with businesses “just waiting it out,” but that longer-term tariffs would cause businesses around the globe to seek new suppliers and new customers with lasting impacts on trade.
He offered four reasons for tariffs:
- To influence terms of trade
- To raise revenue
- To adjust trade imbalances
- To protect industries important for national defense or against foreign dumping
With all the changes over the past few weeks, businesses and the Federal Reserve are just in a holding pattern until tariff policies are resolved.
They say a picture is worth a thousand words, so take a look at the nearby chart presented by Alessandria showing imports (in gold) and exports (in blue).
Note the big rise in total gross domestic product over the past decade, but also the bigger share from imports, which is why we are running big trade deficits.
Jim Bullard, former president of the Federal Reserve Bank of St. Louis and now dean of the Mitch Daniels School of Business at Purdue University in West Lafayette, Indiana, talked about tariffs, inflation and monetary policy.
He began his comments by noting that the U.S. economy was in good shape going into 2025 with solid growth (2.1% GDP), low unemployment (4.3%) and moderating inflation (2.5%) — all of which have allowed tariff negotiations to occur without pushing the economy into recession.
Bullard noted that while some have predicted rising chances of recession ahead, other signals like a positive yield curve did not. He agreed with the Fed’s “wait and see” data-dependent approach to interest rate changes.
I found his game theory of a trade war, showing expected impacts under four different tariff scenarios between the United States and the “Rest of World” (ROW) to be most interesting.
Here’s a look:
Note that the best outcomes are when the United States and Rest of World play with LOW tariffs — free trade.
It appears the United States has been playing with LOW tariffs while R.O.W (especially China) is playing with HIGH tariffs, in which case R.O.W. wins.
The worst outcome is with a trade war with everyone playing with HIGH tariffs — much like when the Smoot-Hawley Tariff Act was passed in 1930, something many economists say severely damaged global trade and worsened the Great Depression.
Bullard did note that we’ve had trade wars before, the last during 2018-2019 when a “war of words” between China and the United States occurred.
Fortunately, deals were reached with only modest economic damage, but threatened tariffs today are much higher.
Finally, Bullard talked about interest rates — worth noting given his years on the Fed.
The Fed aggressively raised rates in 2022-2023 to combat inflation, and then cut rates several times in 2024 as inflation cooled.
But he noted that longer-term yields today may be pricing in the U.S. fiscal situation (growing deficits and debt) with investors demanding higher returns to compensate for these risks.
Note: I talked about this in previous columns, and it appears Congress is going to continue kicking the can down the road with deficits of perhaps $3 trillion to $5 trillion under current tax/spending proposals.
Montecito resident Lee Ohanian, a UCLA economics professor and Senior Fellow at the Hoover Institution at Stanford University, spoke about California’s housing affordability and homelessness crises. Both are huge topics that truly hit home with all of us.
Not surprising to those of us lucky enough to live here, Ohanian noted that California home prices (median $889,000) are more than DOUBLE the U.S. median home price ($410,000), with the median price of a Santa Barbara County home at more than $1.4 million.
This has created a true affordability crisis with only 16% Californians (and 8%-12% of Santa Barbarans) able to afford a median home, compared to 50% of U.S. households that can afford a median U.S. home.
Ohanian presented data showing that higher California home prices are not just a function of “environmental quality,” since in past decades California homes were only 20%-30% higher than the national average.
And it’s not a population explosion. California’s growth rate was just over 2% for the past decade.
So, WHY are California home prices so high?
Ohanian presented information suggesting that regulations, while often well-meaning, are a major contributor to affordability problems.
He noted that problems began with the California Environmental Quality Act (CEQA) and that there have been more than 100 new housing laws passed in California.
Among them are the highly unpopular regional housing needs allocation (RHNA), a state-mandated process that takes building control away from local communities and requires low-income housing in high cost areas.
There are clear indications that CEQA and the whole host of other state and local regulations have slowed and even blocked housing production, creating California’s housing shortages and high prices. It’s simple economics: supply and demand.
Ohanian gave the example of the Newhall Ranch project to build 21,000 homes in Santa Clarita, in northern Los Angeles County. The development was proposed in 1994, and the first environmental impact statement was done that year with additional reviews, analysis and reports continuing until the first homes were built 27 years later, in 2021.
Ohanian offered a three-step solution:
- Reduce building regulations to reduce costs
- Build where land is more affordable (90% of California’s population lives on 5% of the land)
- Use modern building efficiency (like manufactured housing), which could cut structure costs by 50% or more
And Ohanian went on to tackle another huge problem: homelessness.
He noted official statistics showing California has 186,000 homeless (there are other estimates running as high as 400,000), despite spending more than $37 billion since 2019.
Ohanian noted state and federal audits exposing poor oversight and fraud in programs. He suggested the need for program oversight/accountability, the need to refine sensible scope of services, and the need to incentivize responsibility, without which affordability will spiral out of control.
Facts seem clear that waste is rampant, with some low-income/homeless apartments costing more than $1 million per unit.
Ohanian also said that regulations recognize substance abuse as a “lifestyle choice” and provide for permanent housing regardless of substance abuse, yet substance abuse and mental illness are leading causes of homelessness.
As with the housing affordability crisis, Ohanian offered solutions:
- More beds for treatment of substance abuse/mental illness
- Reunite the homeless with family
- Improve K-12 schooling to prevent future homelessness
- Strict oversight/accountability of spending programs
Rupert was the final speaker, talking about “trade winds and digital tides.” We are indeed fortunate to have him and the Economic Forecast Project team here in Santa Barbara, as few communities of our size get the kind of research they provide.
Rupert agreed with the other presenters on several areas, including the fact that the U.S. economy was quite strong pre-tariff and that we are not in recession.
Much like Warren Buffett, Rupert highlighted our country’s resilience with about 2% real annual GDP over the past century regardless of who was president.
With regard to tariffs, Rupert simply noted that “we don’t need to create our own recessions” — in line with the other speakers who worried about potential longer-term tariffs.
But data presented by Rupert continue to show that Santa Barbara County is lagging other regions of California and neighboring counties, with retail falling since 2000 and leisure below 2022 levels.
This chart clearly shows how Santa Barbara County is lagging Ventura County, the state and the nation.
Rupert commented on how artificial intelligence (AI) was already making a difference in economic and trade research.
For example, he showed how AI was being used to track millions of bits of data from the shipboard automated identification system on the more than 100,000 vessels traveling on the world’s oceans at any time.
The program is looking for “dark ships” that turned off their tracking systems. AI helped determine that these “dark ships” had transported 7.8 million metric tons of crude oil — about 43% of global seaborne oil exports — to sanctioned ports that likely allowed China to buy lower cost oil from Iran and Russia.
This was a real example of the power of AI being able analyze millions (maybe billions) of data sources and provide meaningful information to humans.
Finally, I found one of Rupert’s thoughts quite interesting. He talked about the formula for calculating GDP — (Y = C + I + G + (X − M) for those of you who are interested) — and how net imports are typically shown as offsets to GDP, with recent examples from The Wall Street Journal, CNBC and other news sources.
Rupert said they were wrong. Without getting too “wonky,” he used an example of Samsung importing a TV worth $1,000, which under the formula would in fact reduce GDP.
But someone buying the TV for $1,000 would then increase consumption by that same amount — so zero net difference in GDP.
Who says economic theory isn’t exciting?
We are very fortunate to have this kind of high-level analysis brought to Santa Barbara. A big thank you to Rupert, the UCSB Economic Forecast Project, the speakers and the program sponsors, including Noozhawk.
