The biggest threat to the US economy is policymakers

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Something is still wrong with this economy. It is booming in many ways, with a strong labor market, healthy balance sheets for businesses and households, and strong consumption. But some, like Jamie Dimon, CEO of JPMorgan Chase & Co., worry that we may see the calm before the storm. There are signs that things could get gnarly. Inflation is at its highest in 40 years, the shelves are empty, real wages are falling and labor is scarce.

Government and monetary policy will play a large role in how this works out, but these policies also pose 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 improve their lives. But growth is not guaranteed. Many countries have adopted policies that have undermined growth. At the beginning of the 20th century, for example, Argentina had the same GDP per capita as Canada; now, Canada’s GDP per capita is more than five times that of Argentina, in part due to the South American nation’s reckless fiscal and monetary policies and decades of political instability following the Great Depression. The economic fortunes of Haiti and the Dominican Republic diverged after the 1960s. Rich countries were blessed with the right policies — and a bit of luck — that fostered growth. Often, policies change after a major shock like the pandemic. Currently, the US economy has a lot of potential, but much will depend on the policies implemented by public authorities.

In the short term, policy makers need to do something about inflation. It was partly bad policy that led to high inflation in the first place, including excessive stimulus in 2021. Then the Federal Reserve was too slow to react.

In the face of inflation in the 20th century, the Fed repeatedly caused recessions by intervening too late and too harshly. A mild recession may be inevitable at this point because the Fed has also fallen so far behind the curve this time around. How it handles rate hikes over the next few years will determine the course of inflation and the severity of a downturn, if any. The more the Fed makes miscalculations, the more the center of the target shrinks: raise rates too high and the economy contracts; don’t go high enough and prices will continue to rise and inject more uncertainty into the markets, which can also cause a recession.

Additional risks come from fiscal policy in Washington. President Joe Biden says his inflation strategy is to let the Fed do its job, fix supply chain bottlenecks and control deficits (it’s unclear how he will do the latter, because higher taxes or severe spending cuts can slow the economy). There is a chance that these policies could help the economy, depending on how they are executed. But the price controls proposed by Senator Elizabeth Warren would only discourage production and create more shortages. Canceling student debt will also do nothing to help inflation.

While a short-term recession would be painful, the fundamentals of the economy are robust enough that it won’t be too long or deep. Much more worrisome are policies that could undermine long-term growth. The desire to relocate production, maintain tariffs from the old administration – or even add more – as well as domestic production subsidies result in higher prices and less resilience as there are fewer trade, which means fewer goods. It also makes American industry less innovative and efficient since Americans don’t need to compete with companies from other countries as much.

Now add to all that the recent antitrust push. Traditionally, the government has gone after companies whose monopoly power harms consumers. The new fad is to target companies that become so big that they crush any potential competition. Competition is good for growth and there are legitimate concerns about unfair practices that regulation should address. But the problem with the new antitrust approach is that it often targets companies (at least in the rhetoric we’ve heard) simply because they’re big.

Big is not necessarily bad. In fact, a more global and technology-driven economy creates better returns to scale and some scale may be needed. Bigger may be needed in an economy where access to proprietary data and a large number of users is needed to improve products. Bigger can also mean lower costs. Reducing American companies and depriving them of scale can be another blow to American competitiveness.

The US economy remains one of the most innovative and dynamic in the world. It is still a top destination for global talent and budding entrepreneurs. The enduring popularity of the dollar and dollar-dominated assets reflects an economy that should continue to grow. But past performance does not guarantee future growth. The right policies can get us out of our current situation, but after that, policy makers just have to step aside.

More other writers at Bloomberg Opinion:

Biden’s economic hubris gives way to humility: Karl W. Smith

Don’t want the Fed to suspend rate hikes: Mohamed A. El-Erian

Who is to blame for a recession, Biden or Powell? : Daniel Moss

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Allison Schrager is a Bloomberg Opinion columnist covering the economy. A senior fellow at the Manhattan Institute, she is the author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk”.

More stories like this are available at bloomberg.com/opinion

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