U.S. Economic Policy Bets that Are Disregarding History – Currency Thoughts

U.S. Economic Policy Bets that Are Disregarding History

July 15, 2025

While Republicans and Democrats agree on little, one notable exception is that the policy agenda of the Trump Administration may be the most transforming, or alternatively radicalizing, package of changes ever tried in the nation’s history. Time will be the ultimate judge of whether, taken in totality, this policy upheaval makes the nation more or less great. Forecasting how an economy the size of the United States will respond to policy shifts can be a humbling experience, and one cannot be certain that a change tried now will succeed or fail from how economies were affected from similar experiments in the past.

The worrisome dimension of the Trump agenda is how many of its economic policy bets defy history. The chances of an idea working now that failed when tried before is far greater than the probability of success in many actions being pursued now that have a bad history when tried before. Below is an incomplete example of maverick policy initiatives that defy the lessons of history.

• Huge tariff hikes will not fuel inflation. It’s highly implausible that tariffs will not create supply chain disruptions. The effect of a broad supply-side shock experienced as countries emerged from Covid was considered “transitory” until it proved otherwise. Along the way to a new normal, second-order price hikes kicked in, forcing central banks around the world to slam on the monetary brakes.
• Tariffs will provide a new source of government revenue growth and not be a drag on U.S. economic growth, except perhaps for a brief initial adjustment phase. Let the record show that the McKinley tariff of 1890 and the the Tariff Act of 1930 were contributing, albeit not the main, factors behind the U.S. Panic of 1893 and the Great Depression.
• By stimulating faster economic growth, big supply-side tax cuts generate increasing tax revenue and are therefore unlikely to result in greater net deficit-spending. Granted, this free-lunch theory is alluring. However, bigger fiscal deficits ensued after large tax cut packages in the 1980s, 2000s and 20-teens. It should be noted too that the second and last of those three examples ended in non-direct catastrophic circumstances, namely the sub-prime mortgage crisis and the worst pandemic in a century.
•  Soft-power diplomacy is for suckers. Military strengthening is a safer path. Soft power was neglected in the inter-war period with tragic consequences. After fighting two world wars in the space of just three decades, it’s no coincidence that the world got through the ensuing eight decades without a third world war, thanks in large part to the path set by George Marshall.Monetary policy ought to be coordinated with fiscal policy. There are innumerable examples backing up the assertion that monetary policy becomes more successful when central bank independence is enshrined by law. Even more importantly, investors need to be confident that politicians are not influencing interest rate and other key decisions that define monetary policy. An unwisely loose policy stance when Arthur Burns was Fed Chairman earlier in the 1970s inflamed the problem acutely and had been intended to help reelect his good friend President Nixon. Inflation was additionally fanned in the Carter years when Treasury Secretary Blumenthal and Assistant Secretary C. Fred Bergsten jawboned the dollar downward in an effort to make it more price competitive and thus conducive to shrinking the trade deficit. Changes in the dollar and price inflation measure the value of  a nation’s money, one externally and the other internally.
• Greatly lower U.S. interest rates would cut America’s debt service burden, thereby complementing other policy changes intended to achieve faster growth. Trump has expressed a belief that a 1% interest rate target would not be too low. Is is it not fair for a president duly elected by voters to not have policies upon which he ran undermined by an unelected monetary policy committee? No. In places where monetary policy decisions have been heavily influenced by political leaders such as Turkey, that prioritization has created chaos as seen in the wide swings of the interest rate from 8.25% in 2020 to 19% the next year, then back to 8.5% in February-June of 2023, 50% in March-December 2024 and now at 46.0%. Among G7 economies, Britain has far more consistently achieved price stability since the elected government gave interest rate decision making responsibility over to the Bank of England. Likewise, inflation in Italy and France has been much more stable since the creation of the euro and a single central bank for all member countries.
• Climate change can’t be made to go away by political edict. Nor are the costly consequences of climate change disappeared by deciding that there’s nothing mankind can do about the problem. Increasingly expensive insurance and/or unavailable coverage will impact business costs profoundly and pose obstacles to business risk-taking.
• Deportations and reducing legal immigration will have a direct impact on GDP growth, which is a function of labor productivity and the change in hours worked. Even if the impact on population growth could be offset by incentives for more births from legal citizens, it will take two decades before that incremental source of new workers could be old enough to start being a solution. Japan is a good example of a country whose economic growth slowed sharply after the population started to decline.
• Two widely agreed factors that drove America up the leader board with the biggest economy, strongest military, and at the top of the most innovative sectors of the economy were universal public education and a top-tier reputation of its universities and colleges. America ruled public education for about a century after 1870. The universities have not only educated America’s brightest but also attracted top research and scientific talent from all over the world, many of whom then make America their home. Privatizing education hasn’t proven a better way, and there are numerous cases where such efforts have failed spectacularly.
• Military prowess will not be sufficient to secure the U.S. Constitution’s broad goals of justice, domestic tranquility, common defense, and general welfare. It was tempting to think with vast oceans on both sides of the country that strictly minding America’s business would be sufficient in the 1920s and 1930s. It wasn’t so then and would be less so in today’s shrunken world.

The above list of areas where history is being disregarded is incomplete, but even the breadth of these nine examples casts doubt on the the new road map to “greatness.” The overarching question is whether autocratic rule can achieve better results than democracy. That wasn’t the case in the last two centuries. America’s main challenge this century is again coming from autocrats. In a competition among autocratic systems, it isn’t clear that America is preparing to stay safe, internally unified and well fed, housed and employed or that it will emerge on top.

Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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