Several years ago I read Matt Ridley’s “The Rational Optimist: How Prosperity Evolves.” In the book he makes a point that hit home for me: The “problem” with the economists in the Carter administration was that they were economists first and Democrats second. I remember it because one of my former bosses was in the Carter administration. I enjoyed his stories and that quote, while funny, accurately describes him and others I knew back then. As much as they may have wanted reality to be different, they were not about to promote policies they knew wouldn’t work. Even if they were popular with their political side. Where are those professionals today?
The Biden administration got in trouble by following an economic theory known as Modern Monetary Theory (MMT). MMT suggests that the government can print money to finance spending without limit. I’m not sure how otherwise intelligent economists could possibly believe such nonsense, but it had the benefit of being a progressive’s dream, so Biden followed it; and just as real economics suggests, the end result was the worst inflation we have seen since, well, Carter. As a result, we have a second term for Trump.
Now at least one of Trump’s economists is telling him that tariffs are a wonderful way of stimulating domestic growth and raising revenue for the government all at the same time. This is a protectionist’s dream. The problem with dreaming is that eventually one wakes up. Tariffs have never been a good idea and they still are not. The laws of economics are what they are; trying to fight them never works out well.
How serious is the administration about implementing tariffs? That is the question we should all be asking. Much of the tariff talk is just that – talk. It is obvious that Trump wishes to use the threat of tariffs as leverage in negotiations, but it is less clear what will become reality. One thing is for certain: the economy moves very fast today. That speed means any tariffs that become a reality will have an almost immediate impact. In fact, we were told by one client that a vendor of theirs was raising prices by 10 percent in anticipation of yet-to-be-implemented tariffs.
This is just a guess, but I believe that if the negative effects of tariffs are seen, then the administration will reverse course pretty quickly. In the meantime, all this tariff talk has pundits once again claiming that recession is around the corner. I guess they figure that if they just keep saying it, that sooner or later it will actually happen. (Personally, I think I would be too embarrassed to speak publicly after being so wrong for such a long time.)
The actual economic data suggests that we are in the middle of the economic cycle and not near the end. As of this writing, the Atlanta Fed’s GDPNow indicator of real time GDP is at 2.3 percent, which was the reading for the 4th quarter of 2024. Unemployment remains very steady at around 4 percent. That is the latest reading, and it has only varied 0.2 percent either way since the 4th quarter of 2023. Unemployment being steady for more than a year and the economy still growing bodes well.
The market has retreated of late based on fear, but this too has to be kept in perspective. The market has been on a big run over the last two years. Stock prices are expensive still, and corrections are a normal part of a bull market. This is anecdotal, but Nvidia just reported earnings that grew 81 percent from last year, yet some still found excuses to be negative.
They call economics the dismal science. That has always struck me as odd, because economists as a whole are almost always more optimistic about the future than the average person. That was actually the point of Ridley’s book: some might wish they could spend without limit or tax foreign competitors out of existence, but the laws of economics force us to deal with reality.
All resources are scarce, even for the government, and competition + cooperation is the path to better economic outcomes. The Biden administration found this out the hard way. Let’s hope the Trump administration doesn’t actually take us down the tariff road. If they do, we will all be singing along with The Clash, “I fought the law and the law won.”
Warm regards,
Chuck Osborne, CFA
