I remember as a grade school child in the 1960s watching a video (we called them films then) of life in China. Small community pots would melt down scrap metal to make what was called pig iron. China in our mind back then was economically barely beyond the bronze or iron age. Japan’s economy was little more advanced. In fact, the term “Made in Japan” was pejorative. Now, it indicates products of high quality. My how have times changed. It is high time we revise our views of China’s economy too. Unfortunately, few North Americans can attest to anything China based on direct observation. While COVID-19 certainly shook up world travel, in 2019, the year before COVID hit, about 2.4 million Americans, 2/3rds of 1% of the population, visited China. In the same year, about 776 thousand Canadians visited, about three times the rate, at 2% of its population. While the US and Canada constituted the most non-Asian visitors to China, most North Americans travel elsewhere. China only ranks in sixth place for traveling Canadians. It does not fall into the top twenty for Americans. I mention this only because, if we do not experience cultures and economies abroad through our own eyes, we instead interpret them through others who often have not been to such nations themselves and who may have a political agenda. Our political narratives are often based on the history of world wars and the Cold War after that. The Great War was one which forged the U.S. economic destiny. An ocean of conflict insulation meant the U.S. was not forced into World War I. While Canada fulfilled its obligations as an ally of the United Kingdom, and Canadian kids enlisted in droves from the onset, the U.S. did not formally enter WW1 until it was almost over. Instead, American factories churned out the armaments and airplanes to fight World War I, and reupped its economic ante to World War II for years before it was the last to enter that war. This meant that the U.S. benefited mightily from each war, and built an economy of manufacturing scale that could not be mustered by allied nations, Japan, Germany, and China who were simply trying to survive while America thrived. This left America as the only major economy standing as World War II ended and the Cold War began. In a Youtube video worth watching, Louis Vincent-Gave ( https://youtu.be/RC8HVOPc2vM?si=HuAyDTCsedITuEMk ) related a lament from German officers about American military power - “"One of our Tiger tanks is worth four of their Shermans, but the Americans always bring five." The sheer scale of the American economy during and post-WWII allowed it to dominate global economies for another half century. To cite these anecdotes is somewhat risky these days. We’ve been raised on a steady diet of American exceptionalism, cemented by successful moonwalks (Neil Armstrong and Michael Jackson), Boeing, the transistor, integrated circuit, Nobel-prize winning universities, cellphones, music and movies, and myriad other vehicles to export American innovations to a fascinated world. To assert that such exceptionalism was inevitable, given the size of the economy and the buying power of its large population is taken by some as skepticism over American exceptionalism. But, with globalism, a concept America championed at the conclusion of World War II, other nations now share in these successes. England revolutionized rock and roll in the 1960s, Volkswagen and Toyota became the world’s largest car manufacturers, Airbus now makes more planes and profits than Boeing, and we can’t buy American appliances or televisions anymore. The very nature of competition is imitation. Fosbury invented the flop but now all high jumpers use the same technique. All cars have cruise control and windshield wipers even though Cadillac championed them. An academic develops a new idea. If it is a good one, hundreds or thousands of her peers will take the idea still further. Competition should not be viewed as encouraging imitation, the greatest form of flattery, but should instead be viewed as raising the bar, just as the American Dick Fosbury caused high jumping bars to be raised every Olympics since the 1968 Mexico Games. Imagine how uninteresting bicycle racing would be if nobody but its originator was permitted to draft behind another stronger cyclist. Millions would die if nobody could successfully transplant a heart after Dr. Christiaan Barnard did so in Cape Town, South Africa in 1967. And certainly every nation watches closely the innovation of every airplane coming off the drawing board abroad. Now we call such flattering imitation as spying. As America loses its group as the sole and dominant manufacturing and innovation nation, we have increasingly shifted our fascination of other’s innovation and guard American innovation against industrial espionage. At least at the political level, American industrial policy is now devoting an unprecedented amount of energy into the prevention of imitation rather than the creation of innovation. Now, there is a role for the State in finding the right balance of innovation. One of Britain’s and the United States’ gifts to the world is the firm establishment of property rights in the rule of law, in England by precedent and in the U.S. through a constitution. This meant that we could all agree to a concept of private property that would be protected by the state so we can go to work instead of standing guard with a shotgun to ward off looters trying to steal our stash. Metaphorically, innovators could then do what they do best with a modicum of patent protection not to prevent imitation but to have the imitators share in the increasingly princely sums modern innovations require. The U.S. too played an early role here, not only in enshrining patent protection into constitutional principles, but also in championing bodies in the wake of World War II such as the World Trade Organization and the World Court. Of course, there are other international treaty organizations such as the Convention of the Law of the Sea that the U.S. refuses to sign (and remains the only major coastal nation and the only Arctic nation to refuse to do so), but one of the hallmarks of American global leadership has been its embrace in treaty and in action of globalism, at least until 2025. What has all that got to do with China? A couple of things come to mind. First, as the U.S. abandons globalism, it leaves a vacuum in its wake that China is all too happy to fill. Their ascending global leadership will shift the equilibrium between nations for decades to come. Second, China learned well from President Trump’s first term that trade treaties mean nothing if a nation is willing to capriciously and unilaterally retract them. It learned its lesson in September of 2018 when President Trump’s first administration began a trade war with China. Following that episode, China invested massively in economic resilience. It developed huge new sources of sustainable power so it would be less dependent on American or global fossil fuels. In doing so, it created the least expensive new supply of energy of any major nation, and gave its industries a huge cost advantage. Knowing it would have a scarcity of labor at some point, it developed a plan for automation to become perhaps the world’s most productive workforce. Compare two Tesla plants - one in Fremont, California (the world’s largest Tesla plant) and another in Shanghai. Musk’s China plant can produce each car with only half the labor of the U.S. plant. And each of these laborers earns less than 20% of their American counterpart. Musk pays more for health care of each American worker than the cost of an entire Chinese employee, who is also twice as productive. Such investment in this economic transformation was expensive, as today’s graph shows. It was aided by a savings and investment rate among Chinese citizens that is an order of magnitude larger than their American counterparts. It meant gutting the residential real estate sector, at great cost to their economy and people’s savings. And it required China’s society to buy in to this transformation for China’s economic resilience, a feat no doubt much easier given their political system. But, it did not assume any sort of cheating or unfair competition. Twenty years ago the U.S. led in almost every one of 74 key technology categories. This year the Australian Strategic Policy Institute reported that China now leads in 67 of these 74 categories, including solar power, wind generation, battery technologies and state-of-the-art automobiles. For instance, Ford President Jim Farley recently observed that Chinese electric cars are a “major humbling force” because of their superior technologies and cost efficiencies. He noted they “pose an existential threat” if U.S. manufacturers can't compete, and that ceding the future of EVs to China isn't an option. Farley also said Ford could not compete with Toyota and Hyundai - but nobody accuses Japan and South Korea of unfair trade practices. China did not create their superior in-car technologies, dramatically lower battery costs, or faster innovation cycles by cheating or stealing American ideas. They did so through a national plan to increase competitiveness and drive down costs. This industry is a metaphor for what China did in just the past few years as the U.S. instead turned toward trade wars. It would be irrational to assume that the U.S. can reverse China’s success simply by doubling up on tariffs. That will only make China redouble what has worked so well for them and so poorly for us. Instead, and as painful as that might be to our national pride, we should do what every country does when they see a superior technology elsewhere. Japan sought technology transfer by allowing American companies to start Japanese plants in the 1960s. Taiwan engaged in technology transfer in the 1970s, and China in the 1980s and 1990s. In a way to get around concerns that American-made F35 fighter jets they purchase may have kill switches built in to them turn off if a Canadian prime minister offends an American president, Canada is now considering buying Saab Gripen fighter jets, with the promise that Saab would build them in Canada and enhance Canada’s aeronautical manufacturing sophistication. The point is that a nation does not become that “shining city on the hill,” using President Ronald Reagan’s metaphor, by building moats and tall walls. It does not horde its magnificence nor trip up its neighbors. A nation becomes great by shining brightly, sharing its magnificence, spreading its wealth through generous foreign aid, embracing its allies and setting an example of liberty to its potential foes. It makes other nations become great too by emulating and engaging in the great nation so it too can have liberty and prosperity. This may even require sharing innovations freely so others can innovate still further, just as academics share ideas so others can help expand the sphere of human knowledge. It is a mentality that, if we can make the global economic pie bigger, everybody’s piece of the pie will grow too. That is the concept behind economics, in contrast to those who instead believe they can grow their pieces of the pie by reducing the size of others. It is a fundamental belief in the world as a positive-sum game rather than a constant- or shrinking-sum game. Now, I know a prideful nation can be angry when past promises go unfulfilled and new generations are unable to share in the wealth of the past. The natural tendency is to lash out and blame others for an economy that is failing them. It’s hard to blame ourselves, so humans often blame the other - any other. I understand the frustration. It must be validated and addressed. And I know that to address China's success as competing American companies like Ford atrophy under a lack of a national industrial policy can be viewed as being a China apologist. However, if we are to return to the shining city on the hill that acts as a positive beacon for all to emulate, we must assess things realistically and objectively, rather than through arrogance, complacency, or hostility. I'd like to see the U.S. return to its past glory, and I'd like to see Canada, Europe, and whoever else who aspires equally to join it. How about you?

Some key economic data came out this past week that would usually warrant some comment. I am going to hold off on that until some more data comes out though because the consumer price information that was released remains a bit problematic. It was missing data from the previous month and seemed more timed to measure Thanksgiving weekend grocery discounts than a true measure of the economy. Nonetheless, it showed slightly improving inflation but with more significantly worsening increase in unemployment that is three times worse than the layoffs of federal employees. More on that later. Instead, let’s try to better understand the effects of tariffs by exploring one key commodity necessary for manufacturing items as varied as the cars we buy or the cans that hold the beer we consume. It’s not oil, sometimes called liquid gold. It’s solid electricity - Aluminum. There are a few industries for which electricity is such a prominent factor of production that their cost of manufacturing tracks electricity prices. One is bitcoin, in which about 90% of the cost of processing bitcoin transactions is consumed in electricity purchases. Similarly, Artificial Intelligence is highly electricity-intensive. Combined, these two processes are increasing electricity demand and raising the prices Americans pay to keep our homes lit and heated. Canadians have a bit of an advantage there because they have not allowed bitcoin mining to take hold as much as it has gripped US energy usage and politics. Canada is now identified as a good place for AI, though, with Microsoft recently announcing a $19 billion investment in new Canadian AI production and processing over the next few years. That investment is huge, given the size of the Canadian economy, and will surely move Canada up further from its 14th positions worldwide on the incorporation of AI into its economy. (The U.S. did not post in the top 20). One reason why Canada is becoming more central globally in such things as AI integration, cloud storage, and innovation is that it is blessed naturally with abundant sustainable electricity. Fully 80% of its electricity is non-greenhouse gas emitting, with about two thirds of its energy coming mostly from hydroelectricity. Such abundant electricity is cheap. The United States knows that. Today’s graph, courtesy of the U.S. Energy Information Administration, shows the very large imports of energy from Canada to the United States. While it costs a fair amount to build a dam or build out a solar or wind farm, once constructed that energy is almost free. This very low cost energy favors industries that rely highly on electricity. In addition, Canada has not squandered that electricity in ways seen south of its border. It resisted the big influx of bitcoin mines that inundated the U.S. once they were forced to leave China. Mainland China realized that they could make more money manufacturing the mining machines used worldwide than in being forced to burn more coal to mine bitcoin itself. The U.S. opened its arms to these miners, and its retail electricity users have been paying the price ever since. This leaves Canada with a distinct advantage in producing solid electricity - aluminum. Let’s for a moment discuss the role aluminum plays in Canadian manufacturing, how the U.S. benefits from this low cost and essential manufacturing commodity, how the new 50% tariff on Canadian aluminum is forcing up car, appliance, and beer prices for Americans, and how it is false to claim that Canada has an unfair trade advantage or is “dumping aluminum" in the U.S. market as President Trump claims. The world’s largest aluminum smelters coincide with those nations that can provide the cheapest energy costs - Russia, China, Canada, and Norway, for instance. In fact, Norway’s main facility is owned by a large hydroelectric conglomerate, Norsk Hydro, which is substantially government-owned. With abundant and cheap hydroelectric power, the small nation of Norway is an aluminum powerhouse because upwards of 60% of the cost of energy production costs are from electricity. Similarly, Canada is a world leader in aluminum production, primarily where there is the most hydroelectricity - British Columbia and Quebec. Just as South Africa can corner the market on diamonds, Boeing and Airbus can produce better aircraft based on their engineering advantages, and Saudi Arabia is a petroleum powerhouse, Norway and Canada can produce aluminum cheaper than just about anywhere given their endowment of energy. This abundant supply of cheap aluminum is also good for partners who trade with these nations. For instance, the U.S. is more industrialized than Canada and simply cannot make aluminum as cheaply as can Canada. Nor should they. If the U.S. tried to be aluminum self-sufficient, all its products employing aluminum would be uncompetitive, too much resources would be diverted to an industry that can never outperform, American consumers would lose out in higher prices, and American exporters would find other nations do not want to pay the price for their airplanes, as an example of a heavily aluminum-dependent industry. This is an example why a claim that Canada somehow competes unfairly because it can price its aluminum cheaper than other nations that trade with the U.S. simply makes no sense. Its comparative advantage in energy prices permits a lower price, not unfair competition. Canada is not “dumping aluminum” if it has a natural cost advantage in aluminum production, just as Canada does not “dump softwoods” just because timber land is so abundant in the world’s second largest country covered with trees. Similarly, Walmart is not dumping the goods it sells at a lower price just because it has a very efficient supply chain. To have 50% tariffs slapped on Canada simply because it can take advantage of its natural resources makes as little sense as if the world imposed a 50% tariff on SpaceX rocket services simply because it can launch rockets cheaper. In the end, economically unsound claims of unfair trade practices has certainly hurt Canada. But it also hurts those nations that depend on access to Canada’s inexpensive natural resources, especially the American consumer. Economists would take this argument still further. For instance, if China feels that it wants to subsidize its exports, that is equivalent to the Chinese government sending a check to American consumers. What is the problem with that, unless the goal was to so weaken competing U.S. producers that they are put out of business. I cannot think of many, if any, cases of such “predatory export pricing,” although I am sure that such ruthless competition occurs on occasion. In fact, the most common form of predatory pricing is actually between U.S. corporations within the U.S. - Meta swallowing up competitors or Microsoft making Internet Explorer so cheap that it forces competitors out of the market. In the end, if exorbitant tariffs force Canadian aluminum and softwoods to dry up, the U.S. will be forced to either buy more expensive aluminum elsewhere or divert its own precious manufacturing capacity into uncompetitive industries. It would also need to generate more energy and at high cost given its opposition to wind and solar, the high price of fossil-fuel electricity production, and the multiyear shortage of gas turbines. Either way, when international trade is harmed by false claims of unfair competition, it is far more likely that those who cry wolf will be left holding the bag.

Last week three pieces of economic data were released. On this side of the Pacific, economic data, information on the American economy is dribbling out. I will wait for the drabs in a week or so before I comment on how hard it is for the Federal Reserve to steer the economy when both unemployment and inflation have remained stubbornly high for a year, and when the Administration is trying to skewer the Federal Reserve chair trying to pilot the increasingly rickety plane. At the same time, Canada is showing resilience. Its inflation is coming down, and its economy is actually growing, despite every attempt from its closest friend and ally to trip it up. The real story, though, is the record goods surplus in China. For the first time ever, it exported a trillion dollars more goods than it imported. No nation has ever commanded such a large goods trade surplus. To understand its implications, we must dive a bit deeper into exchange rates. The value of one currency against another is just simple supply and demand. We understand that as the price of something goes up, more entities will supply it, and fewer can afford to purchase it. This interplay between suppliers and demanders sets the price of things in a free market system. This basic notion of supply and demand has operated for millennia. Global free markets are a more recent innovation. Until relatively recently in our economic history, nations held to a gold standard that required each nation to peg its currency to an ounce of gold. Up to 1933, a U.S. dollar was valued at $20.67 per ounce of gold. This rose to $35 dollars under the Bretton-Woods agreement that lasted through to 1971. Over the same period, 4.25 of UK’s pound sterling was equivalent to an ounce of gold. This rose to about fifteen pounds per ounce of gold up to Richard Nixon’s abandonment of the gold standard in 1971. The implication of a gold standard is that we know precisely the value of one currency compared to another since each was valued and could be exchanged for gold. With the effective exchange rate of currencies set by the capacity of each nation to back its currency with gold, trade between nations must be balanced. If not, gold must be moved from one country to the other to rebalance any trade imbalances. Once the largest economy abandoned the gold standard in 1971, the value of one currency versus another depended on how many international traders needed each currency to purchase the goods of another. If one nation’s goods and services were in high demand worldwide, its currency would be in greater demand and the currency’s value would rise. The higher value of the U.S. dollar for example (when it ran trade surpluses) would then make its goods and services appear more expensive in global markets, and the amount Americans must pay to import goods or travel abroad becomes relatively cheaper. This process ensures a balance (equilibrium) between the amount of stuff other countries bought from the U.S. and the amount of stuff Americans bought from other countries. Well, that is only half the picture. The other half is not the use of currencies to trade in goods such as manufacturing or services such as engineering or travel, which economists call the “current account”, but also in international investment, labelled the “capital account.” Let’s pick on another country for a moment. It was reported this week that China ran the largest goods trade surplus in history, of more than $1 trillion, in 2025. This is even more remarkable given that the statistic only covers the first eleven months of 2025. However, China also trades in services, not just the goods we clamor to purchase for their low price and ever-increasing quality. In that dimension, China runs a slight services trade deficit. A service is something we buy that we can’t put in our closet or garage. China provides some services to the world, in engineering abroad most notably, but it also purchases the services of shipping companies to transport all the goods it exports, licenses for intellectual property such as American music and patents, and tourism and education as its citizens travel abroad as tourists and students. Their services trade deficit amounted to about $165 billion last year, with about a fifth of that in a deficit with the U.S. When combined, it may well be that by year’s end, China’s combined trade surplus will be very near a trillion dollars. So, if exchange rates adjust to balance inflows and outflows, where is that trillion dollars going? Let us imagine that China insists on the exchange of currencies to all flow through a large China-controlled clearing house such as its central bank. This would mean that there would be an additional trillion extra American dollars sitting around in its vault each year as more US dollars were flowing in to convert to their currency to buy their stuff than is converted back to buy US dollars and its stuff. This analogy is simplistic, though. A Chinese consortium could use the US dollars flowing in to help pay for some US goods or services it might need as part of its production process. Hence, no conversion of currencies would be necessary. Or, and here is where it gets interesting, Chinese firms might use some of those excess dollars to buy US manufacturing plants, US real estate, US companies, or US stocks and bonds. It will certainly want to buy something. If it does not, there would be a stack of US dollars just piling up somewhere, not earning interest and being eroded by inflation. Any transfers of currencies by a Chinese banking authority does something similar. It may decide to keep a little bit of the excess of US dollars to augment supply and demand for its own currency and hence keep its currency at a rate that provides for long term stability and favorable trade terms. Such “floats” total about $3 trillion for China, of its $3.5 trillion in reserves for all nations. The US also holds reserves of currencies of other nations, but these are less than a trillion dollars. China holds massive reserves that don’t just represent a bunch of dollars sitting idly by in their vaults. Instead, they can reinvest reserves in what is the new “gold standard” of investments - US treasury bonds. In other words, China also invests in the US budget deficit with funds it obtains from the US trade deficit. Such demand for US dollars to invest in US federal government spending keeps the US dollar strong and China’s goods a relative bargain. What if the U.S. government did not need to borrow because it no longer ran a federal budget deficit? Then, either China would instead have to invest in more US factories and stock and real estate, or, if not, would have to raise China’s exchange rate to bring its trade surplus in line. Quite simply, America’s budget deficit helps fuel China’s huge trade surplus. What would happen if, in spite, China refused to reinvest their surplus American dollars? Their stock of unproductive currency would reach such levels, and be such a burden on its central bank that it would eventually have to revalue its currency. But, at the same time, the Federal Government in the US would also have to react. With a big chunk of the the buyers of US government bonds disappearing overnight, but with little desire of the federal government to stop spending far in excess of tax revenue coming in, which is approaching a $2 trillion annual deficit, the US government would be forced to raise the interest rate it pays on its debt to attract new lenders. Larger interest payments further worsens the budget deficit, given that such debt will exceed $40 trillion by the end of next year. Even a 2.5 percentage point rise in its yield would tack another trillion onto its budget deficit. In other words, the US really needs China, and China knows that, of course. That is why President Trump is trying to force the hand of the Federal Reserve to lower interest rates. In incredibly simplistic short-termism, the President believes that the Fed can simply lower its interest rate by, let’s say, 2.5 percentage points, to make up for any shortage in the Federal Government’s capacity to borrow. This is simplistic because the magical interest rate the Fed sets is not in the prevailing interest rates in the economy, including government debt, but rather only in very short term lending it offers banks in a pinch to maintain sufficient cash reserves. What the President is really saying, and I am not convinced he knows it, despite his hope to appoint his economic advisor to be the next Fed chair in May, is that the Federal Reserve must stand by to purchase as many government securities as the President wishes to sell it. In essence, by aiming for balanced trade with China, it is implicitly assuming that the Fed will simply print money to buy US bonds and allow the US government to spend well beyond its means. That is essentially what the Weimar Republic did to try to enable Germany to recover from the Great War. It led to a 700% inflation rate. And it is an entirely different Fed policy, called quantitative easing, than its lowering of the interest rate it offers banks. The Fed's job is not to bail out the Federal Government by printing money and contribute to inflation. Instead, it is to moderate inflation and stabilize employment. Other things China could do with US dollars if it decides to not reinvest in the US is to purchase more commodities worldwide denominated in US dollars, such as oil from Russia or Iran or other cash-strapped nations needing US dollars to buy its own goods and services abroad. After all, since the US prides itself on being the world’s reserve currency, there are plenty of nations that would accept purchases of their goods and services in US dollars so they can purchase their fossil fuels, US movies and music, etc. China could then use such purchases of US-denominated goods and services to subsidize companies in their own country, to purchase US technologies and intellectual capital, and to further enhance its own domestic investment and demand. In fact, one of China’s biggest strengths, its incredibly high gross domestic savings rate of 43% of GDP (compared to 18.6% in the US), means that their domestic interest rate is very low and its private sector probably overinvests in some dubious projects such as a glut in domestic housing. Compare that to the US problem of a shortage in private sector housing because of a shortage in housing investment capital as so much investment capacity must flow to the purchase of government debt to support the huge US budget deficit. Once the Chinese public is convinced they must buy more stuff instead of saving so much, China’s economy can rebalance around higher domestic consumption and a more domestic-focused economy that would be even more resilient than it is now. The moral of the story is that all this stuff about trade and surpluses and tariffs is far more complex than the simplistic mantra we hear in the news. Despite some domestic economic problems of its own, China holds a lot of cards, they know how to play their war chest, and each year they make some more. Now, you would think that is a metaphor the President can appreciate.

Last week we discussed just how hard it is for even a median income household to afford a median priced home. As a consequence, the rate of homeownership in the U.S. has been dropping to below 65% since reaching a peak of 69% twenty years ago. Increasingly it is only higher income households that can afford to buy homes. Much of the rest are left to rent. At the same time, rents have been increasing dramatically, which leaves many more households living paycheck to paycheck with no appreciable savings, given that the largest bulk of middle-class wealth is in home value appreciation. If we look at housing policy in the U.S., we see why. The incentives for homeownership are tilted significantly toward the wealthy. This is ironic because the wealthy are those who least need an incentive to purchase a home and can most easily afford that American Dream. The largest subsidy in the U.S., but not in Canada, is the deductibility of mortgage interest. First, a household must have sufficient tax deductions to make worthwhile itemizing their various deductions. These include state and local taxes, mortgage interest, and other items. Of course, a low-income household cannot afford a sum of these deductions that exceeds the standard deduction all households can take in the alternate. Hence, itemization tends to be for households with incomes over about $200,000, live in a high property tax state, and with significant mortgage interest. A household on the lower end of this income threshold pays a marginal tax rate (including state taxes) of 20-25%. One with double that income, around $400,000 per year, pays a marginal tax rate of 35-40%. These are the subsidy rates on mortgage interest paid. Those whose income is too low to itemize but who still somehow manage to eke out the savings to buy a median home receives no such subsidy at all. Let’s look at three such households that each buy a median home. One is a low-income home that does not itemize and hence receives no deduction for mortgage interest. The second middle income household faces a combined 20% tax rate at the margin, and an upper middle-income household pays a 40% marginal tax rate. Today’s graph shows the lifetime subsidy each of these households receive. For 2023 home prices and mortgage rates, the wealthier family who purchases a median-price home receives a lifetime subsidy of $187,289. The modest income household earns half that, or $93,645 over the lifetime of their mortgage, while a lower income household receives no subsidy at all. In 2023, the median home price in the U.S. was $426,525. The subsidy of $187,289 granted the wealthier household was 44% of their purchase price. The moderate-income household receives a subsidy worth 22% of the same median home, while the low-income household receives no subsidy at all. The wealthiest households receive an even greater subsidy from the rest of American taxpayers. We also see from the graph that the subsidy to the wealthy has increased dramatically over the past couple of years. As the interest rate rises, not only is homeownership farther front the grasp of many citizens, but the subsidy to the wealthy increases still further. An adjustment signed by President Trump in his first term made these deductions a bit more expensive in some mostly-Democrat states, but that penalization has since been relaxed. We are left with a system designed to make homeownership must easier for the wealthy, but with little or no benefits from those who must really stretch to buy a home. Of course, the wealthy can also purchase homes valued at much more than the median price, so their subsidies rise even further. These policies that favor the wealthy are not the only ones. Zoning laws are defined locally and often tend to favor larger lots as a way to keep home prices up and hence property taxes up as well. Municipalities often compete for well-heeled residents, something economists call the Tiebout Effect. A locality cannot blatantly restrict access by income, but it can impose zoning requirements that cater to the types of homes and properties only wealthier families can afford. This predatory zoning further restricts homeownership for low-income households. Last week we discussed just how increasingly difficult it is for low-income families to afford even a modest home. One with lower income or wealth may have no choice but to live farther away from the center of economic activity in a city. This distance is beyond access to rapid public transportation that tends to push property prices higher. Hence, low-income households who must live further out from city centers must also shoulder higher commuting costs as they are forced to rely on personal vehicles for commuting. The costs of owning, maintaining, and commuting a significant distance almost entirely negates the savings in home costs by living farther from the town center. These additional costs are often prohibitive, and are certainly not tax-deductible as is the mortgage interest of their wealthier counterparts who live closer in. Finally, as home prices rise, those who can afford the more expensive homes also receive the greatest capital gains on the value of their homes, assuming an identical percentage home price increase across the board. Since taxes can be avoided from such capital gains for those selling one home to buy another, wealthier families with the more valuable homes also receive greater tax avoidance advantages than their more modest income citizens. Not only do the wealthier households enjoy greater home profits, but they also avoid capital gains at their higher tax rates. Part of these phenomena that dramatically subsidize the wealthy over those barely able to realize the American Dream of homeownership are exacerbated by the fact that it is often property and not the home itself that drives home prices. We have discussed in recent weeks how to take the land cost element out of the equation by maintaining land in a public trust without at all discouraging people from building a home that suits them. One reader noted that Vancouver has experimented with such land trusts. At times, First Nations people may offer long-term leases on land they own but forever keep the land itself in the public trust, consistent with a belief that land should be used by all, not owned forever by a few. When I was mayor of my city, I tried to create a land trust in my municipality but was stymied by the county treasurer who wanted to usurp the idea (she never did create that land trust). A white paper was shared with me recently by a reader that recommended such land trusts in the United Kingdom, but there appears to be little movement along the lines of their recommendations. We know there are tools to make homeownership both more affordable and fairer. Simple changes in the tax codes that change the mortgage subsidy from a deduction to a tax credit that is phased out as income rises would do a lot to make homeownership more affordable while still remaining budget neutral. However, especially in the U.S., the system seems amazingly resistant to any change that would level the playing field or even tilt it a bit toward those who most need a helping hand. Politics seems incapable of adopting such progressive policies, and there are few to no economists in the halls of political power, at least in the U.S. Canada now has an economist at their prime minister. Let’s hope that nation cal lead the way in housing affordability.

A reader of this economics blog last week pondered additional aspects of housing policy in America. The topic is expansive, and deserves at least two parts. The gist of it is summed up in an exchange I heard between two fellow hikers earlier today. A young woman was having trouble keeping up on a steep and ragged portion of the trail. Her partner (at least up until today) responded that it was not his fault her legs were so short. She should not expect any assistance, and should just live with it. That kinda sums up our benign attitude toward housing - except, as I will illustrate, in fact we don’t even maintain such an indifferent stance, tinged with a note of hostility. Instead, our mish-mash of housing policies are decidedly tilted - and not to those struggling to put a roof over their heads. In this first part, I shall describe just how increasingly out of reach homeownership is becoming for the average American. In the next installment, I shall describe the various incentives offered for housing - wait for it - those who can most easily afford it. Much of homeownership affordability is related to the cost of a typical home, the income of a typical household, the mortgage rate, and the required down payment. From these parameters, a “conforming mortgage” in the United States determines whether a family can purchase a home. The first barrier to homeownership is that a household must provide 10% of the home cost up front as a down payment. If it can do that, the rest can be financed. However, monthly debt payments, including housing, student loans and other debt, cannot exceed 43% of regular and verifiable income. These criteria are actually a bit of a relaxation from past years. Previously, housing payments could not exceed 28% of income, with total debt of 35% of income. And 20% was the requisite down payment - else the mortgage interest rate would rise to cover additional mortgage insurance. Policies had to be relaxed given the huge runup in housing costs that have pushed home prices so high that a 20% downpayment was almost impossible. In addition, median households are now saddled with more debt than ever before, mostly due to student loans and rising automobile costs. Back in the 1980s, total debt as a share of income hovered around 10% for an average household. It rose to about 16% back in the 2000s, but has since fallen back down to almost 12%. This is a bit deceptive, though, because a wide swath of increasingly low-income Americans do not have access to credit of any kind. While debt load may be only about 20% higher than in the 1980s, much of that is because of the very low interest rates post-Great Recession. Those days are gone, though. These factors combine to yield a median age of first-time homebuyers that has risen to 40 years, a middle-aged record high. By 2025, only 21% of homebuyers were first-time. Most homebuyers are now 62 years or older. And in just fifteen years, the average homebuyer went from 39 years old to 59 years old. That is a huge shift in homeownership demographics. The American Dream of buying a home has turned into a nightmare. A 40-year-old first-time homebuyer who purchases a home at current interest rates has barely paid off half their mortgage by aged 60. The hope that home equity will be the major household form of savings for retirement has become a pipe dream for most first-time buyers. To see this, today’s graph shows the increasing unattainability of homeownership. When I compare the cost of servicing the mortgage on a median-priced home relative to median income, the pattern is clear. A ratio of 100% indicates a median household can afford a median home. A median home is now 26% more expensive than a median household can afford, a record high over the past 32 years that dates back to the beginning of the Clinton Administration. These ratios have even included the more recent attempts to make homeownership more affordable by lowering the down payment and by permitting households to incur even greater debt to buy into the American Dream of homeownership. The current administration proposes to address this problem by forcing the key Federal Reserve interest rate lower and by extending mortgages to 50 years rather than the current 30 year maximum. These policies are artificial or dysfunctional. As past blogs have explored, the Federal Reserve only sets a very short-term interest rate for its member banks. The Fed does not underwrite mortgage interest rates, which is determined by supply and demand. Sure, there would be plenty of demand for mortgages of a lower interest rate, but there would also be scant supply. In the end, mortgages would be artificially rationed to only with stellar credit scores, the wealthiest and the most advanced in their careers and life. This does not contribute to attainment of the American Dream of home ownership. President Trump also recommended replacing a 40-year mortgage with 50 year mortgages. You did not read that wrong. Of course there are no 40-year mortgages, but if one never had to struggle to scratch up the savings to buy a single-family home, perhaps one would not know that. In any regard, a 50-year mortgage does little to solve the problem. Homeownership would still remain 12% too expensive to permit a median home to buy into the American Dream, despite the gimmick. And, that median 40-year-old household has only paid off 44% of their mortgage by age 65. This gimmick does little to solve the problem, despite the great sound bite. Homeownership is becoming decidedly more elusive. In recent blogs, I have described how the great transfer of wealth from the pockets of those who own our human capital to the far deeper pockets of those who own land has pushed so many out of the housing market, and some even into homelessness. Demand is frustrated by high home prices that escalate far quicker than incomes, while relative supply is increasingly constricted by predatory zoning, rising populations, and increasing urbanization. Yet, there is little discussion about moving toward a system of more affordable housing alternatives such as more tiny home communities and policies that encourage downsizing by baby boomers left with homes far too large for our needs. Faced with myriad institutional costs of downsizing, many find it too expensive to transition to right-sized homes. One of the reasons for all this dysfunction is that the current system of housing policy bestows far greater implicit subsidies on those who can most easily afford homeownership, at the expense of the rest sitting outside of affordable housing and looking in. The phenomenon of systemic failures in housing policy is what we turn to next week.

This past week saw an unusual meeting between two seemingly political foes. President Donald Trump hosted an extended lunch with New York City Mayor-elect Zohran Mamdani. The two emerged as best friends forever. Let’s see how long that lasts. Just ask Elon Musk. Mamdani famously campaigned on affordability, and rightly so. Over the past few decades the share earned by the median income household, as a percentage of GDP, has lost ground. A median income salary does not go nearly so far in the U.S. as it once did. Perhaps nowhere is that more true than in New York City. Perhaps Mamdani has a point. It is time to rethink rent stabilization policies in areas in which rents are skyrocketing. Such a concept is economic sacrilege, so some explanation is in order. There are things that New Yorkers pay little more for because they are easily reproduced and transported. Food bills are not substantially higher, even if restaurant bills must cover the higher wages required to eke out a living in the City. Electricity is not dramatically higher than elsewhere, and other items such as mortgage interest rates and insurance are not disproportionate. The real culprit is the cost of housing. In 1987 when I was a young lad working for the Harvard/MIT Joint Center for Housing Studies, I did a report on New York City rent controls. My, how times have changed. So must how we interpret economic theory. Back then, the conventional wisdom was that price controls of any sort sends the wrong signal to markets. A price held artificially low creates greater demand, which is perhaps an unambiguous consequence, but it most troublingly creates reduced supply. The price of something must cover its costs, and, until suppliers become charitable donors to society, a price unable to cover costs will result in a reduction of those willing to bring their goods to market. Economists’ unwavering faith in free markets mediating willing suppliers and demanders and unfettered by government intervention usually means the analysis stops there. Rent-controlled, or the lesser-regulated rent-stabilized, apartments in New York City, it is argued, should be returned to the free market. The fortunate recipients of artificially low prices must just fend for themselves with all the others. This conventional wisdom deserves reconsideration. Something economists sometimes ignore at our peril and in our zeal is that not all costs to bring something to market are equal. Yes, indeed, the variable costs of production, in labor, materials, and machines to make things must be covered by the sale price. And an artificially low price will make it impossible to purchase as much of these important factors of production. Artificially low prices prevent goods and services made with these factors from reaching free markets to the same extent. But, there is another cost that is often far less important, but is critical sometimes. With housing it is not so much the cost of building materials or construction workers that dictates the price of shelter. It is the cost of land and the exorbitant profits generated in many urban and some suburban housing markets. In recent blogs we have discussed this barrier to housing affordability. I even refreshed our discussion of Henry George, the maverick 19th century commentator who rallied against the monopolization of land and its consequence of making a few rich while the many scrambled to put a roof over their heads. Land is different from the other factors mentioned above in that we cannot make more of it. Especially in places such as New York City (or Toronto or Vancouver), land has been developed generations ago and put to its most profitable use. To create new housing in these urban areas is pretty much impossible if one must also cover land costs and ensure the profits to those few who own the bulk of that land (President Trump likely included). Economists are almost innately driven by efficiency. My profession is determined to wring greater efficiency out of the economic pie by using our resources better or more wisely. That’s not the case with land, though. Instead, land has become an economic justice and not an efficiency issue. In the almost 40 years since I did the study in NYC, the debate is not how to do more, but who benefits from what is already being done. From that perspective, it is a fair discussion for Mamdani to assert that, after hundreds of billions of profits but with little or no new housing, perhaps expanded rent stabilization makes sense in that most unaffordable universe. Land is the ultimate political football since we can’t make more. Hence we are merely debating who can enjoy the spoils of land profits - those who have benefited from them to such an extent that the land component of housing has pushed shelter beyond the realm for many, or those who need a more affordable lease on life. Young households just starting out, and often riddled with student debt, are certainly in that category. So too are the elderly who may be forced to leave where they have lived all their lives because no social security payment can possibly keep up with accelerating land prices and apartment rents. In fact, today’s graph shows that over the last generation or so, the median household income index has remained about flat while rents have increased by 70%. That one most basic necessity is becoming increasingly unaffordable and out-of-reach. The rising population of homeless people is but one poignant indicator of the increasing divide between the haves and have nots. Now, I know this all sounds sacrilegious for an economist. But remember something David Ricardo taught us more than two centuries ago. Land is the ultimate fixed factor of production because we can’t make more. The only issue then is to determine how the spoils that flow to land should be divided - to make a few incredibly wealthy or to make housing affordable to the masses. Rent stabilization or control can accomplish such goals without resorting to what the wealthiest find even more unpalatable - a tax on their wealth.

The electric grid is falling apart. Long live the grid! The United States resides in a glorious past. Edison pioneered electric generation on the Niagara River, and Tesla revolutionized it by moving away from direct current and into alternating current. A grid was soon designed around the ability to easily raise and lower AC voltage so that high voltage lines could deliver power hundreds or thousands of miles. And what a wonderful grid it was. Designed essentially with early 20th century technology, it built out electricity superhighways to connect existing urban centers, and then branched off, hub-and-spoke style, to serve smaller towns and rural areas. The grid remains essentially unchanged today in the U.S., despite incredible changes in technologies and energy generation as we soon approach the middle third of the 21st century. The U.S. does not have a coherent plan, and indeed has regressed even farther from a plan over the past year. That is a problem. We would have been far better off if Eisenhower built out the interstate highway system and a national electric grid at the same time. I was surely difficult to garner the property rights to build out a national highway system. Imagine if, when a nation does that, it also secures the rights to move electrons rather than Chevy Volts. If roads must be built to transport people and the supply chain, these same routes may be ideal for energy too. If we were to do it again, we could employ underground high voltage direct current lines, something impossible in Tesla’s time but is feasible and more efficient than AC current now. The median mandated by modern highway design standards is an ideal place to bury and protect high voltage electric wires, out of the elements and unsusceptible to forest fires, lightning, even solar storms. We know the routing exists and new technologies now exist that can better provide for transportation of energy to meet increasing needs for Artificial Intelligence innovation. So, what’s stopping us? Well, it is expensive, but so is the piecemeal way electricity is delivered today. Bitcoin and AI have ratchetted up electricity demand, and residents are paying the price. Over the last fifteen years, my electric rate has tripled. Half of that increase is to fund regional utility’s request for rate increases to improve the grid and build more power. Unfortunately, this “investment” won’t solve the problem. The travesty is that there is power, but not always where it is needed. For instance, New York or Ontario may have a shortage of electricity in the early evening as people come home and cook dinner, while the West Coast may have excess energy then. And once the East is winding down, the West could use more power as they prepare dinner. Because the US grid is not considered a national interest as we do the interstate highway system, we instead leave it to every state or region to create their own fragmented system. They may form regional entities to alleviate some of the problem, but they are not at all interested in a national solution. All you have to do is follow the money. If the system is fragmented, each utility acts as a local monopoly. To ensure it is not too ruthless in exercising its monopoly power, utilities are regulated. Herein lies the problem. The regulation is cost-plus. If a utility can create an untenable situation, it can petition their public services commission for a rate increase to cover the cost of new investment plus a reasonable profit. With such cost-plus regulation, the utility has no interest in economizing because an allowed 10% profit on a $50 million investment is half the profit than one on a $100 million grid upgrade. Households are bleeding dollars because of this dysfunction. The industry has no incentive to integrate their networks, and heavily-lobbied government has no interest in coordinating a better national grid. Canada does a better job in the creation of national electricity networks. While the provision of electricity is considered a provincial responsibility, Canada’s proposed budget includes projects that create energy transportation networks which span provinces. Americans might call that socialism. Canadians call it common sense. With the increased demand arising from bitcoin, AI, heat pumps, and electric vehicles, and with wind and electric power now the least expensive form of electricity, it’s high time we look at our grid in a new way. Kudos to Canada for stepping up to the plate. America, what are we waiting for?

Canada is in the throes of budget approval, and Washington is merely trying to pass a Continuing Resolution to keep the lights on after failing to pass a budget by the October 1 deadline. In the U.S. the stakes are high. While the executive branch and both legislative branches felt they could pass the budget without any cooperation of the minority party, their attempt to use their majorities in every deliberative body failed. The opposition party asked and then demanded a negotiation over their prized Affordable Care Act health care program that was axed by the majority, but the majority preferred to shut government down rather than negotiate. In sending everybody home, and in ceasing all budget bill discussions in Congress, the U.S. federal government is at a standstill. Economic data has been embargoed, programs such as those who provide food to children in poverty have ceased, and commercial flights are increasingly grounded. At the same time, the minority government in Canada has presented its budget. The document is aspirational. It trims the government’s operating budget, but vastly expands investments in a nation that increasingly feels threatened by their American cousins. I expect the Canadian parliament will pass the budget. Their system encourages healthy discourse, and even requires the governing party to answer questions from the opposition parties once each day. But they also want the government to function, and would rather pass a budget than try to bring down the government. In fact, if a budget is ever rejected by vote, that automatically constitutes a no-confidence motion that forces an election. Some parliamentarians want more operating spending in the budget, some want less, but nobody wants the government to fall into dysfunction. Prime Minister Carney has a great deal of experience on Wall Street. He adopted a budgetary tool that I used to use as mayor, and which other governments and all corporations use, but is never mentioned in Congress. It is an explicit section of the budget that defines just how much the government intends to spend on investments in the nation’s future rather than services for citizens today. Wall Street and corporations routinely use the budgetary category they label Capital Expenditure, or CapEx, to delineate the types of projects that the budget proposes to invest in as a way to sow the seeds of future profits or prosperity. Such capex is essential for economic growth, and should be the most deliberated element of a corporate or national budget. It is this discussion that is currently debated in Canada. The proposed budget, which shall surely pass, creates the largest budget deficit in Canada’s history, but for the Covid year. While historically large, it is less than half the size of the U.S. deficits, even when adjusted for Canada’s much smaller population. But, it is large for Canadians and it makes a historic investment in Canadian competitiveness. And, it is still vastly lower than US deficits in blue (as a share of GDP) as shown in today’s graph, with Canada in red. That’s the reason why the budget will sail through. I don’t mind buying a house if I know I can enjoy affordable housing services for years to come. I’m willing to front savings for a car, or invest in education. In fact, most people are motivated to make such personal investments to the degree to which we are willing to make sacrifices today and make payments well into the future. That’s what CapEx does. We set aside some income and consumption today to create even greater opportunities for the future. Well-functioning government does the same. It builds roads and airports and lays track and electric distribution lines, and maintains such existing infrastructure, subsidizes education, and invests in the research and development that will someday translate into patents, prosperity, profits, and prevention of cancer, dementia, and the debilitating effects of childhood poverty. The difference is that these investments pay healthy dividends well into the future. Such CapEx lasts sometimes for years, and sometimes for generations, especially when compared to operating spending that merely keeps the lights on today. Canada’s capex is designed to attract scholars and R&D from around the world, build homes to put them in, and pursue major projects that will open up new markets to replace the broken supply chain that used to look south. Such investments that will pay back the full amount in renewed prosperity in just a handful of years are sound economic policies, even if they incur penalties such as budget deficits and higher taxes today. Such prosperity expands the tax base to painlessly pay the people back well within the expected life of the new projects and initiatives. I outlined in a recent blog some of the investments a nation could make to stimulate housing. I guess PM Carney was reading it because these ideas made it into their budget. Carney also asked regional premiers and corporations to nominate large and transformational projects. The government promised that they would help partner with the private sector for half a dozen such grand projects this year, and will go further down the list next year. The Canadian government also pledged to invest more in the Arctic by building roads, bridges, ports, and airports, and by making an unprecedented investment in defence of the Arctic, even if it means potentially partnering with Saab to build fighter jets in Canada or with Finland to build a large fleet of icebreakers. To now, Canada has been spending around $1,500 Canadian per capita on defense. That is less than the $2,200 US that every American spends on average, but it is a lot for a nation with a smaller economy per capita and without global ambitions to project strength across the free world. With the increase in defense spending scheduled over the next few years, Canada will be more than pulling its fair share, but will concentrate its efforts in maintaining the integrity of its Arctic Archipelago and with strengthening NATO. The point is that a nation does not mind spending a lot today if it means increased prosperity and national integrity tomorrow, just as I don’t mind spending a pretty penny today to enjoy a safe place to live for years to come. Now, I’m certain that no government anywhere invests as much due diligence in calculating the return tomorrow on investment today, based on sound public accounting practices. However, to at least delineate capex in a national budget is a great start, especially if it unites a nation on a shared vision of the future. That is what CapEx budgeting is supposed to do. The argument for the calculation of a public return on investment can be viewed this way. An investment in future growth, even if funded by a deficit, ultimately competes for our savings. We save, perhaps by investing in the stock market, by investing in private corporations, for which we expect to receive profits in the future. Increased taxes result in reduced private investment, but if the return on investment (ROI) is higher from some strong public investments, it is worth that diversion of savings. This leads to the need for government to calculate the return a thoughtful investment can provide to the public underwriting it. We need more public CapEx ROI calculations. If we describe projects in these terms, a wise public will see the wisdom. I know some nations view government as part of the solution, rather than the problem, and some do what Canada is doing. I’m sure Americans would benefit too by taking such a CapEx approach to national investments to create future prosperity and expand the tax base. I don’t know if a good idea is enough to overcome cynicism and legislative dysfunction, but I can imagine the transformational effect that could occur if the U.S. invested massively in its future. Half a trillion per year, above and beyond the (declining) investments in R&D and education it already makes would allow the U.S. to emerge as a powerhouse in energy, technology, AI, and drug research, and may even allow it to catch up to China in these dimensions. Canada can compete in these areas, but its smaller economy means smaller capacities to invest. It cannot dominate in multiple economic spheres as China does and America could. But it can recognize its unique asset - the world's second largest country by landmass, with huge amounts of natural resources the world needs and with rarely matched access to nature. Any nation should first aspire to recognize its assets, but it must then figure out how to optimize their utility. That must be a deliberative process supported by a unified and undivided electorate.

Regular readers recall that once a month we run through the state of the economy. In the many years of this blog and these articles, I cannot recall a time in which the state of the statistics has been more compromised or peculiar. The seas are rocking, there are icebergs on the horizon, and the steady hand at the wheel is being attacked from every angle. Let us begin with an anything but routine rundown. Our analysis asks about trends in the recent past of three months so we can better determine expectations for the future. In today’s graph we see something troubling. By every measure, inflation by all recent and current measures is now solidly between 3% and 4% and is decidedly trending upward. Of course, the graph of the day is incomplete as most of the data that supports the late issuance of the consumer price index has not been released. That makes the job of the Federal Reserve much more difficult. The Fed does its best to maintain an inflation rate around 2%, so inflation is significantly higher than targets, and strongly moving in the wrong direction. Normally, this would be cause for alarm at the Federal Reserve, or at any central bank in a G7 nation. There are other compounding problems though. In the U.S., job creation is anemic. The U.S. economy should be creating 150,000 to 250,000 jobs every month to merely tread water, maintain some growth, and avoid accelerating unemployment. Some private sector economists have estimated job creation to be a third of the normal level, and, by some measures, may actually be contracting. Consumers get that these are precarious economic times. The Consumer Sentiment Index is at one of its lowest points since it began not long after World War II. At 55.1, it is half that of the 1990s. The Inflation Expectations Index also reveals that households expect to soon see a 4.8% inflation rate, and markets don’t seem to want to disappoint. Here is where I must put a pin in it. Normally, we would have the luxury of a number of measures from which we could triangulate. As it is, data for the Consumer Price Index is only dribbling out. Worse, the government won’t release producer prices or price data from the Personal Consumption Expenditures survey. I know the government is in the throes of the second longest government shutdown in its history, and shall this week surpass the 2018 shutdown of 35 days. Then, the Democrats headed the Senate, while this time it is the Republicans, in the Senate, the House, and the Executive Branch. The only commonality is that President Trump oversaw both shutdowns. That does not mean that government employees are not going to work. Air traffic controllers, despite their reduced numbers, are trying their best to keep the skies safe. Our military is still deployed, courts are open, and the dedicated experts that collect and process our critical economic data are likewise surely still doing their best, despite not getting paid. We see that because the Consumer Price Index was released, even if other data is being held back, perhaps in the theory that no news is better news than bad news. And while the House has been sent home for an extended holiday, the Federal Reserve is still meeting in these most uncertain times. They know that risk and uncertainty kills markets so they are doing the best they can to navigate some of the choppiest waters in quite some time. Their job is most difficult. Data is missing, and the revolving door of chief statisticians, now appointed in proportion to their loyalty to the executive branch rather than to accuracy and transparency, makes any data that trickles out most suspect. Not only is the water increasingly choppy, but the world’s largest economic ship is navigating in a thick fog with its radar and GPS turned off. In such perilous circumstances, perhaps we could rely on data from our allies. No, wait, we don’t have many allies anymore either. Instead, the Fed must rely on data it collects and inferences it can glean from information other sources publish. If these were normal times, the Fed could simply say that we should just hold the course and not zig to fight inflation or zag to stimulate job creation. In normal times, doing nothing is perfectly appropriate. These are anything but normal times. Normally, with anemic job creation, the Fed would be doing what it can to lower interest rates to encourage corporations and consumers to invest and spend. Such “loose” monetary policy, now called quantitative easing, is never super effective, but it is better than sitting on our hands and watching unemployment rise. What is much more effective is the opposite policy, “tight” monetary policy that raises interest rates to discourage spending, building of new homes, expanding factories, and building new commercial structures. This is the far more reliable monetary policy. Even so, once people start expecting inflation, as we indicated with the rising inflation expectation index, it takes quite a bit of monetary tightening over a prolonged duration to get that stubborn inflation rate back to the comfort zone of 2%. This past week the Federal Reserve straddled this fence by lowering the rate they lend to banks by a quarter of one percentage point. They reiterated after this nominal decrease in a key interest rate with a statement that their small turn in one direction should not be interpreted as an emerging trend. Even with such a qualifier, they know that any lowering of the interest rate can even further induce higher inflation. They are forced into a Faustian bargain of a rescue attempt in jobs and output at a risk of worsening inflation and consumer confidence. To make matters worse, bank reserves are at their lowest point since the pandemic panic, and last night the Fed had to inject more than $29 billion into the banking system, the largest amount of cash in five years. The Fed is talking tough about inflation but must quietly do the opposite to keep financial markets from retracting under the weight of increased uncertainty. These are desperate times, without reliable and consistent data, and with capricious economic policies created through social media posts in the middle of the night. The current chairman of the Federal Reserve has already been belittled, suffered attempts to remove him from office, and told that a loyalist will replace him in a few short months. And yet, he still shows up to work and tries to calm markets as best he can to avoid a far worse fate. He knows the highly compromised set of alternatives means the level of economic uncertainty has escalated to troubling heights. He is trusted by markets, though, and has taken the equivalent of a Hippocratic Oath to first do no harm. As economically whacked out as things may be, he knows just how much we need a seasoned captain at the helm. There are always some who wish to normalize the most troubled of times. We have seen incredibly inhuman tragedies occur when a significant minority of society are willing to understate or attenuate disturbing circumstances. Some now argue that the new normal inflation should be closer to 3% rather than 2%, for no compelling reason but to clear the way for lower interest rates. Of course, when inflation is now converging on 4% and expectations on 5%, the new normal can likewise increase, I guess. That is the mentality which has induced hyperinflations in failing South American countries, not the nation that revelled in its role as the global economic gold standard. Chairman Powell, I have been critical at times of the Fed’s unwillingness to act quickly or effectively enough to fight inflation post-Covid. I was equally critical of Chairman Bernanke, the Nobel Prize winning economist who navigated the Great Recession of 2008. These criticisms were matters of delay, not the far more problematic problem of stagflation, a stagnant economy that at the same time is facing significant inflation. In that light, Chairman Powell and his Federal Reserve Board is acting responsibly and irrationally in most irrational times. I do not think anybody could do much better, and I know some could do much worse. We are about to find out.