Edward Lotterman
The week has been interesting. An early jobs indicator showed stronger growth in July than June. The first estimate of output in the April-to-June quarter showed an annual increase rate of 3.0%, up from the first quarter, but driven paradoxically by declining imports. The increase in the price index for “personal consumption expenditures” that some prefer to the CPI as an inflation measure was up 2.6% on a 12-month-earlier basis, but near 3% if you annualize rates of the last couple of months.
And then a meeting of the Federal Reserve’s policy-making Open-Market Committee saw two of the seven members of the Board of Governors dissent from the recommendation of Chair Jerome Powell. This is highly unprecedented, to put it mildly, but had been telegraphed so far in advance by the dissenters that it had little effect on markets.
We live in interesting times, to put it mildly. As President Donald Trump announced a blizzard of trade-threat changes on the eve of his Aug. 1 deadline, one precept is essential. Don’t count your chickens – or trade war victories – before they actually materialize.
Ignoring that basic wisdom tends to result in fang marks on one’s posterior parts. This is especially true in economics where long and variable lags between some cause and its eventual effects are the rule rather than the exception. Yet while that should be common sense, it has not stopped a campaign of triumphalism among Trump supporters.
Fox News pundit Larry Kudlow led off with an article headlined “Trump’s trade strategy is working. The so-called experts are wrong, there is no tariff inflation, retaliation or recession.”
On “PBS NewsHour,” Jasmine Wright, the CNN political reporter recently moved to NOTUS, asserted: “Obviously, we haven’t seen this enormous downturn of the economy, which I think a lot of economists projected would happen by now.”
Sigh! Such optimism sounds like someone who falls off Dubai’s 2,722-foot Burj Khalifa and cheerily cries, “So far, so good!” after passing the top two stories. Trump has been in office six months. Four months have passed since his Liberation Day in April. Deadlines, offers and threats have changed on a daily basis. The number of actual signed “deals” is perhaps eight at best. These contain undefined and unmeasurable “commitments” for trade-partner nations to invest in our country. It is far, far too early to assess how things will turn out.
Yes, tariff receipts are up, although mostly from shipments rushed in under historic import duty rates rather than new ones. The to-and-fro blizzard of assertions and threats by the president has left U.S. Customs offices nearly as confused as U.S. importers and exporters. And since many of his declarations break solemn promises he made earlier, whether in his first term or just a few days ago, no one here or abroad can make firm plans about anything without incurring risks.
Citizens and voters need to understand that “lags” wedge themselves almost everywhere and every time between economic policy actions and their consequences.
Wright’s “a lot of economists projected would happen by now” is sheer nonsense. I don’t know of a single reputable economist who predicted that anything major would happen in four or six months. Only a few support the facile prediction that tariffs will result in a one-and-done increase in consumer or producer prices.
No economist need specialize in economic history to know, for example, that effects of the 1930 Smoot-Hawley Tariff Act were still manifesting themselves four years after its implementation. Charles Kindleberger’s classic “The World in Depression: 1929-1939,” good reading for anyone interested in contemporary issues, contains the most famous economic graph of the century, a spiderweb showing how the value of international trade fell month by month from January 1929 to March 1933. At that point, it was 70% below its start.
Without necessarily predicting equal disaster, it is hard to see how the effects of the current administration’s far broader changes in a far more complex global economy could work through any faster.
The problem of lags is not limited to trade issues. In the 1950s, John Maynard Keynes’ argument that governments could and should control the business cycle of booms and busts gripped most economists. He said that by manipulating both fiscal policies — taxing and government spending, and monetary policies – money supply and interest rates – governments could prevent both excessive booms and destructive busts.
In practice, delays or lags in the processes undercut desired results. Fiscal policies first had a “recognition lag,” actually seeing what was going on. Then Congress lagged in changing spending and taxes. Yet another lag delayed effects of such policy actions on the real economy.
Often, the actions were such that they hit just as the economy was adjusting on its own. Stimulus did not always counter slowing. It might piggyback on natural recovery. Fiscal belt-tightening did not come in time to offset booms. It might rather pile on to turn natural slowing into a power dive.
In any case, Congress’ love of stepping on the gas and refusal to ever use brakes made Keynesian fiscal policy unworkable in practice.
The money side of the new theory had been to increase the money supply so as to lower interest rates in the face of recession and to contract money to raise rates when inflation loomed. Yet Nobel laureate Milton Friedman, although parent of the economic school of thought called “monetarism,” warned against such jockeying with money.
Lags that were “long and variable” in his words could compound problems rather than alleviate them. Better to have steady, moderate growth in money over time, ignoring short-term yo-yos in output or employment.
In the 1980s and 1990s, Friedman’s intellectual heirs put all this in formal mathematical models “proving” that Keynes was flat wrong across the board. Their arguments held sway within the discipline but were ignored outside it.
So now bastardized Keynesianism, in which the Federal Reserve is supposed to cure all society’s ills except “distress in the lower tract,” dominates government and the media.
Just this week, Trump nearly foamed at the mouth when the Fed didn’t cut its rate target when the economy was doing so well. He ignored that a thriving economy may be a reason to tighten. He complained that central banks of other industrialized economies have cut rates and we have not. This ignores the fact that, while several have national debt-to-GDP ratios higher than we do, none are blowing up their annual budget deficits the way his “Big, Beautiful Bill” budget is for our nation. The deficit for fiscal year 2026 projected from Congressional Budget Office baselines is over 6% of GDP. The European Union average has been about 3.2%.
The policy arena will remain fraught for a long time. And it will take not only months but years for the U.S. and global economies to adjust to the largest and most abrupt changes in a century. Hang on for a wild ride.
St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
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