Something is still felt in America’s economy. It is booming in many ways with a strong labor market, healthy corporate and domestic balance sheets and very high consumption. But some, like JPMorgan chief Jamie Dimon, worry that we may be seeing the calm before the storm. There are signs that things may be getting worse. Inflation is at 40-year high, shelves are empty, real wages are shrinking and labor is scarce. Government and monetary policy will play an important role in how this works, but those policies also pose the biggest risk to US growth going forward.
In their natural state, economies grow more than they shrink. Man is notable for his ability to innovate and his desire to improve his life. But growth is not guaranteed. Many countries have adopted policies that undermine growth. At the beginning of the 20th century, Argentina’s per capita GDP was similar to that of Canada; Canada’s per capita GDP is now more than five times that of Argentina, partly due to the South American nation’s reckless financial and monetary policies and the decades of political instability following the Great Depression. The economic fortunes of Haiti and the Dominican Republic changed after the 1960s. Rich countries have been lucky to have the right policies—and some luck—that promote growth. Often policies will change after a major shock such as a pandemic. Right now, the US economy has great potential, but much will depend on public policy.
In the short term, policymakers need to do something about inflation. It was poor policy, in part, that brought high inflation in the first place, including excessive stimulus in 2021. Then the US Federal Reserve was very slow to respond.
When faced with inflation in the 20th century, the U.S. The Fed has caused recessions time and time again by coming in too late and too hard. A mild recession may be inevitable at this point as the Fed has been far behind the curve this time around.
How the Fed manages rate hikes over the next few years will determine the course of inflation and the severity of the recession, if any. The more miscalculations the Fed makes, the smaller the bullseye gets: raise rates too high and the economy contracts; Don’t go too high and prices will continue to rise and create more uncertainty in the markets, which can even lead to a recession.
Additional risks are coming from fiscal policy in Washington. President Joe Biden says his inflation strategy includes letting the Fed do its job, fixing supply-chain bottlenecks, and controlling the deficit (how he’ll do the last is unclear, because of higher taxes or bigger taxes). Spending cuts can slow the economy). There is a chance that these policies can help the economy, depending on how they are implemented. But price controls proposed by Senator Elizabeth Warren would only discourage production and create more shortages. Canceling student loans isn’t going to do anything to help inflation.
Although a near-term recession will be painful, key aspects of the economy are strong enough that it shouldn’t be too long or deep. More worrying is policies that undermine long-term growth. Subsidies for domestic production as well as the willingness to re-shore production, maintain the prior administration’s tariffs or even add more translate into higher prices and less flexibility as there is less trade, Which means less goods. This makes US industry less innovative and efficient because it does not need to compete with firms in other countries.
Now add to all this the recent antitrust push. Traditionally, the government has gone after firms whose monopoly power has harmed consumers. The new fashion is to target firms that grow so large that they crush any potential competition. Competition is good for development, and there are legitimate concerns about unfair practices that regulation must address. But the problem with this new antitrust approach is that it often targets firms to grow up (at least in the rhetoric we’ve been hearing).
Not necessarily bad. In fact, a more global tech-driven economy generates massively higher returns and may require some spurts. Big can be essential in an economy where improving products requires access to proprietary data and lots of users. Larger can also mean lower cost. The shrinking of American firms and depriving them of scale could be another strike against American competition.
The US economy remains one of the most innovative and dynamic in the world. It is still a top destination for global talent and aspiring entrepreneurs. The enduring popularity of dollar and dollar-dominated assets reflects an economy that is expected to grow.
But past performance does not guarantee future growth. The right policies can help us get out of our current situation, but after that, policy makers just need to get out of the way.
Allison Schrager is a Bloomberg Opinion columnist covering economics and a senior fellow at the Manhattan Institute