The Biggest Threat to the US Economy Is Policy Makers
Something still feels off in this economy. It’s booming in many respects, with a strong labor market, healthy corporate and household balance sheets, and a lot of consumption. But some, like JPMorgan Chase & Co. CEO Jamie Dimon, are worried we’re seeing the calm before the storm. There are signs things could get gnarly. Inflation is at a 40-year high, shelves are empty, real wages are shrinking and labor is in short supply.
Government and monetary policy will play an important role in how this works out, but those policies are also the biggest risk to US growth going forward.
In their natural state, economies grow more than they shrink. Humans are remarkable for their ability to innovate and their desire to make their lives better. But growth isn’t guaranteed. Many countries have adopted policies that undermined growth. In the early 20th century, for example, Argentina had the same GDP per capita as Canada; now Canada’s per capita GDP is more than five times Argentina’s, in part because of the South American nation’s feckless fiscal and monetary policies and decades of political instability following the Great Depression. Haiti and the Dominican Republic’s economic fortunes diverged after the 1960s. Rich countries have been fortunate to have the right policies — and some luck — that foster growth. Often policies will change after a big shock like the pandemic. Right now, the US economy has a lot of potential, but much will depend on the policies public officials implement.
In the short run, policy makers need to do something about inflation. It was bad policy, in part, that brought about high Inflation in the first place, including excessive stimulus in 2021. Then the Federal Reserve was too slow to respond.
When faced with inflation in the 20th century, the Fed repeatedly caused recessions by coming in too late and too hard. A mild recession may be unavoidable at this point because the Fed got so far behind the curve this time, too. How it manages rate increases in the next few years will determine the course of inflation and the severity of a downturn, if one occurs. The more the Fed miscalculates, the smaller the bullseye gets: Raise rates too high and the economy contracts; don’t go high enough and prices will keep rising and inject more uncertainty into markets — which can cause a recession, too.