We see a lot of claims about how tariffs affect the economy. Some of my views on this issue are as follows:
1. The most important impact of tariffs is not the impact on inflation.
2. The most important impact of tariffs is not the impact on the business cycle.
3. Most economists overestimate the impact of “real shocks” such as inflation and tariffs on the business cycle.
4. It’s the most important economy The impact of tariffs is on long-term economic growth. (There are other non-economic consequences, such as increased risk of war.)
5. Most economists Please don’t It overestimates the impact of tariffs on long-term growth.
6. The impact of tariffs on business cycles and inflation depends heavily on the response of monetary policymakers.
7. Monetary policy has little impact on how tariffs affect long-term growth.
8. When most average people think about how the “economy” is being done, they think from a business cycle and inflation perspective, and are not a much more important trend in long-term growth.
9. There is a great ruin in the country. So even a big real shock usually appears to have a small impact on long-term growth. However, these seemingly small effects are actually very important. A 0.2% decline in long-term growth is much worse than a 2% decline in GDP over the past year.
To summarise these nine points, there are recipes for a wide range of misconceptions about the recent trade war. I don’t know how much financial offset we might get. And it’s not clear how much tariffs the administration will adjust in weeks and months. Therefore, it is impossible to provide unconditional forecasts about inflation and business cycles. However, I provide some tentative observations.
1. The current tariff levels themselves are probably not enough to cause a recession. Nevertheless, recession is possible due to the interaction of tariffs and monetary policy. Simply put, trade wars are likely to reduce equilibrium or natural interest rates and will likely strengthen monetary policy in 2025. Interest rate cuts are recommended due to the fact that previous financial policies have been extended so much that inflation remains a serious problem.
2. Recent GDP has kept the economy under control in the first quarter. Actual growth could be higher than reported, as large inventory accumulations have been overlooked. Simply put, many products have appeared (at the dock) as negatives in the import category, but have not yet been listed as positives in “inventory investments” (warehouses). For the same reason, second quarter growth is almost certainly exaggerated. Focus on monthly data like job reports to see what’s really happening.
3. The administration faces an interesting dilemma. They failed to deal with the trade deficit, and retreating the trade war can avoid a recession. Or, at the expense of risking the recession, you can push ahead in a more aggressive trade war. Recessions usually reduce trade deficits.
4. We believe that manufacturing is overrated. But if you have to be obsessed with manufacturing, it makes much more sense to get back into production. output Rather than regaining manufacturing employment. In other words, chip manufacturing is not an iPhone assembly.
