The latest GDP report has Washington officials buzzing. Growth hit 3.0 percent for Q2, which is a staggering reversal of the dismal -0.5 percent growth in Q1. The White House claims that this is evidence that their trade policies are “an absolute blockbuster.” 

New Right pundits are pointing out that it beat expectations and that it “has good internals.” Some are even suggesting that economics is a “dismal pseudoscience” and that Trump has “smashed one of the supposedly iron laws of economics.”

“Collapsing imports,” these pundits say, “saved the day” with regard to GDP figures, just as they were quick to use a surge in imports to explain the Q1 shrinkage.

Both are dead wrong. This latest report is just more evidence that tariffs are a disaster, and the economists who warned about them were correct.

Let’s cut through the noise and unpack this report. Trade deficits, as I’ve written, are among the most misunderstood concepts in all of economics. The reality is that imports do not affect GDP at all. To explain this, we need to understand that GDP is meant to measure the amount of production that happens in a country. Since “production” is difficult to measure in and of itself, the Bureau of Economic Analysis instead measures “expenditures.” This makes sense because, if we think about it, any time we spend money on a good, someone else must have produced that good that we bought.

But what about people who buy American-made products who do not actually live in America? Clearly, we should count that spending, too. Lo and behold, we do, which is why we add exports to American spending totals, reflecting the production that happened here despite the spending happening elsewhere.

Because the BEA, however, tallies all the spending that Americans do in a given period, and Americans also spend money on imported goods, that spending on imports would also be included in this expenditure method. To fix this, the BEA simply subtracts the value of all the goods that we import from other countries.

So what does all this mean? All else being equal, when spending on imports rises, GDP will remain unchanged. When spending on imports falls, GDP will remain… unchanged. The simple reality is that spending on imports does nothing to GDP whatsoever.

But does this mean that tariffs, which reduce imports, do not affect GDP? Not in the slightest. 

When raw materials like steel and aluminum, as well as intermediate goods such as automotive components, become more expensive, production costs rise. When the cost of production increases, firms respond by producing less. That reduced production shows up in GDP figures as reductions in consumption, investment, government spending, or exports.

Note here the distinction: imports affect GDP insofar as they are used as inputs into domestic production. Spending on imports, however, does not affect GDP in and of itself. If anything, the relationship between “imports” and “GDP” should be the exact opposite that people allege: when firms buy more imported raw materials or intermediate goods, GDP should actually rise in subsequent reports, not fall. The opposite is also true.

So what should we make of this latest report, especially in light of the first quarter numbers? Frankly, we should conclude that economists warning about the effects of tariffs on business were right.

Consider the fact that in the first quarter, which ended March 31, Trump used IEEPA to actually change tariff rates dozens of times and to implement new tariffs. This, as plenty of economists pointed out, created tremendous uncertainty in what the tariff rates were going to be on a day-by-day basis. When uncertainty rises, businesses slow down and reduce output. Some even close altogether.

Contrast this with the second quarter, which began on April 1. There was “Liberation Day” on April 2, then the famous 90-day pause, a trade war with China (and only with China), and a lot of threats of tariffs. But no actual new tariffs were raised. We also had delays and reductions in previously announced tariffs.

In other words, in the quarter when Trump was imposing tariffs, GDP growth fell into negative territory. In the quarter where Trump was pausing, delaying, or reducing tariffs, GDP growth rose.

But let’s make one thing clear: GDP did not fall in the first quarter because firms were busy stockpiling imports ahead of the tariffs. It fell because actual, bona fide production fell. Likewise, GDP is not rising today because imports have fallen.

Economists have been raising this point for months. Tariffs are not a trade victory. They are a tax on the American people, making it harder for consumers (and businesses) to afford goods and services. This latest report is not a vindication for the White House or the New Right. It’s a case study of the simple truism that free markets work and tariffs do not.

It is useful to have frequent reminders that people often resort to deception to peddle their beliefs. The book The 1619 Project Myth by Phillip W. Magness is highly valuable in that regard, as it devastates the historical accuracy of “The 1619 Project” published by The New York Times. 

That long magazine piece was the brainchild of one of its writers, Nikole Hannah-Jones, who used it to make her breathtaking claim that the true date of America’s founding was not 1776, but rather 1619, the year when the first slaves were landed in North America.

Why say that?

The answer is that, like so many “progressives,” Nikole Hannah-Jones wants to undermine the idea that the United States was founded to increase the people’s freedom and replace it with the notion that the nation’s founding was rooted in slavery and oppression. The American Revolution was fought, in her telling, to preserve slavery, which the colonists feared was going to be ended by the British government. Moreover, she and several of her co-authors maintained, the effects of slavery are still with us. What better way to get people to think of America as a terrible nation that’s in need of radical (or revolutionary) transformation?

Almost immediately after its publication, “The 1619 Project” came under fire from scholars (and not just those on the political right) who found its claims to be unsupported, implausible, and misleading. Among the first was economic historian Phillip W. Magness, now a Senior Fellow at The Independent Institute. He wrote several critical essays about different aspects of the Project, which he compiled into a book in 2020. Now, with more time to reflect on the issues and respond to recent spin-offs from the Project, he has put out a new version. It’s a demolition job of the first magnitude.

Magness writes, “Each new permutation of Hannah-Jones’s work has veered more heavily into political advocacy, taking greater liberties with evidence in the process.” But, faced with a mountain of counter-argument, the New York Times has only made one carefully hidden concession about the doubtful claims in it, while Hannah-Jones and her major contributing author, Professor Matthew Desmond, avoid serious confrontations with those who criticize their work and resort to ad hominem attacks.

The book is more than a point-by-point refutation of the claims in the Project. In it, readers also learn a lot about the history of capitalism in America that they probably would not find anywhere else. Here’s just one example.

While Hannah-Jones and her collaborators want to make people believe that slavery and capitalism were somehow in league in early America, that’s the opposite of the truth. Magness recounts the story of the Tappan brothers of New York City. They were successful merchants who opposed slavery. In 1834, they invited Rev. Samuel Cornish, a black American and abolitionist, to their Sunday worship service. That led to a mob attack on their business and homes, as pro-slavery New Yorkers called their gesture of solidarity an invitation to a slave revolt. Between mob violence and a boycott against them, the Tappans were nearly ruined. But, just when all seemed lost, Lewis Tappan came up with a brilliant plan to revive his business by offering to deal on credit with trusted associates in the abolitionist movement. The result was the New York Mercantile Agency, the forerunner of Dun & Bradstreet. Capitalism and slavery were friends? Nothing could be further from the truth.

Or consider the thesis, advanced by Prof. Desmond, that the American economy was extremely dependent on cotton produced by slavery — so dependent that it was really the driving force behind the nation’s early growth. Magness demonstrates that his claim is not remotely supported by the evidence, then turns the tables by informing the readers that one of the foremost advocates of slavery in antebellum America was one George Fitzhugh, who ranted against the ideas of Adam Smith and other free-market advocates. Fitzhugh declared that the South “must throw Adam Smith, Say, Ricardo & Co. in the fire.”

In short, the philosophy of capitalism was utterly incompatible with slavery, and the pro-slavery crowd knew it. Of course, you will hear none of that from Hannah-Jones or her supporters.

Another revealing spin-off from the 1619 Project is how it affected the American Historical Association (AHA). The president of the AHA, James Sweet, had the temerity to cast doubt on the truthfulness of the claims in a tweet, writing, “As journalism, it is powerful and effective, but is it history?” 

Sweet quickly learned that one is not permitted to ask questions about something so important to the left as this. Magness writes, “Incensed at even the mildest suggestion that politicization was undermining the integrity of historical scholarship, the activist wing of the history profession showed up at the AHA’s thread and began demanding Sweet’s cancellation.” So great was the uproar that Sweet felt the need to issue a groveling apology for having “caused harm” with his tweet. The activists did not bother to engage with Sweet and defend the 1619 Project — they just wanted to see him punished for his apostasy.

If there was ever the slightest doubt as to the political purpose of the 1619 Project, it was erased when Hannah-Jones, in the subsequent Hulu TV series based upon it, called for the nation to pay reparations for slavery. That idea has long been dismissed by scholars of all races as unjust and economically ruinous. Nevertheless, she blithely stated that reparations were needed to atone for our racist past and, to explain how we could pay for the trillions it would cost, told viewers that the government can afford anything it wants just by printing enough money. How do we know that? Because a few crank economists who subscribe to Modern Monetary Theory say so. Thus, the 1619 Project combines false history with ludicrous economics to promote the statist agenda.

It shouldn’t surprise anyone to learn that the American education establishment has been eager to embrace the 1619 Project and bring its materials into school and college classrooms. The leftists who say that the Project is just about teaching students some neglected aspects of American history are simply lying — the materials in it are deceptive rather than informative. 

Magness’s book will be of use to parents or officials who don’t want students to be indoctrinated with propaganda meant to sow hatred for the country and mislead students about capitalism.

The next time you hear anything positive about the 1619 Project, reach for Magness’s excellent book.

Federal Reserve Governor Christopher Waller recently offered his perspective on the Fed’s balance sheet, which still stands at over $6.6 trillion. According to Waller, the issue facing the central bank is not the size of the Fed’s balance sheet but the structure of its assets — especially their duration. It’s a compelling case, and it deserves a second look.

Waller claims that the Fed’s liabilities, which include currency, the Treasury General Account (TGA), and reserves held by depository institutions, are inherently safe. Currency pays no interest, has no maturity date, and is irredeemable, because the Fed has no contractual obligation to “convert” currency into any particular good. The TGA has no financial cost to the Fed, as the Fed pays no interest on its balance. Finally, reserves are the most liquid assets in the market, and the Fed can determine the total supply of reserves available by changing the interest rate it pays on them.

The Fed’s recent financial performance, however, casts doubt on the claim that the Fed’s liabilities are inherently safe: the Fed has been making losses since 2022. During fiscal year 2024, the Fed earned $159 billion in interest income while its interest expense on depository institutions, which includes interest on reserves, amounted to $186 billion. As of July 24, 2025, the Fed has accumulated losses of $237 billion. 

If the Fed’s liabilities are so safe, why has the Fed suffered losses in recent years? 

Waller argues that the risks associated with the Fed’s current balance sheet come from the asset side. The Fed bought large quantities of long-term Treasuries and mortgage-backed securities during its crisis-era quantitative easing (QE) efforts beginning in 2009. It loaded up on even more long-term Treasuries following the onset of the pandemic in 2020. These purchases created a mismatch, since the Fed was essentially funding its short-term liabilities (reserves) with long-term assets. When inflation rose, the Fed had to pay a higher rate of interest on reserve balances in order to bring inflation back down. And, since the rate it paid on reserves exceeded the yield on its (mostly long-term) assets, it suffered losses. But Waller contends this is a problem with QE, not with the ample reserves framework. Had the Fed managed the duration of its assets to more closely match the duration of its liabilities, he claims, it would be in a better financial position today.

In any event, Waller maintains that the Fed cannot go back: “there are external forces that have boosted the size of our balance sheet that are not under the control of the Federal Reserve.” Demand for currency has increased from around $800 billion in 2007 to $2.3 trillion at the end of 2024. The TGA has also increased, from $5 billion in 2007 to between $650 billion and $950 billion in 2024, owing to the Treasury’s 2015 decision to begin holding an estimated week’s worth of federal payments in the TGA. “An important point that applies to both currency and the TGA,” Waller says, “is that the Federal Reserve does not have control over the size of these liabilities and hasn’t been responsible for their sharp increases.”

Together, they represent about $3 trillion of our $6.7 trillion balance sheet, or roughly 10 percent of nominal gross domestic product. So, the size of the Fed’s balance sheet, which is now about 22 percent of nominal GDP, is nearly half accounted for by these two liabilities that are not under the Fed’s control. Those who argue that the Fed could go back to 2007, when its total balance sheet was 6 percent of GDP, fail to recognize that these two factors make it impossible.

Waller added that banking regulations have also “led to a large shift in demand for high-quality liquid assets,” including reserves. Taken together, he says these external forces imply that the balance sheet must be bigger than it was back in 2007.

Waller goes on to say that a larger balance sheet improves the safety of the financial system. 

In his opinion, the balance sheet should not only be larger to account for the rise in 1) the demand for currency, 2) the TGA, and 3) the demand for reserves related to regulatory requirements. It should also be larger so that banks can hold reserves beyond those needed to meet their liquidity requirements.

Waller believes an ample-reserves regime where the Fed pays interest on reserves “ensures that there are enough reserves in the banking system to avoid” a “sell-off in Treasury securities, helping to stabilize the financial system without any harm to banks or their customers.” He also believes an ample-reserves regime need not cost the taxpayers any money, so long as the Fed funds its reserves with short-term Treasuries.

As I noted earlier, whether the Fed or banks hold the Treasury securities, the Treasury is paying interest on its debt. And, if the Fed is holding the Treasury securities, then the interest payment from the Treasury to the Fed on the Treasury bills is matched with an interest payment from the Fed to banks on their reserves. So, paying interest on reserves is not creating any additional expense to the Treasury.

Waller compares reserves to clean drinking water: if something is essential and safe, why make it scarce if it can be made abundant at no cost?

In essence, Waller argues that the Fed cannot go back to a small balance sheet and should not go back to a scarce-reserves system. His back-of-the-envelope calculations put the minimum viable balance sheet at $5.8 trillion today, which is around 87 percent of the Fed’s current balance sheet.

Waller makes a strong case. But four counterpoints are worth noting.

First, Waller conflates the Fed’s decision to meet currency demand with not being able to control the supply of currency in circulation. It is true that the Fed cannot control the supply of currency in circulation if it is committed to meeting currency demand. But regardless of its merits, the commitment to meeting currency demand is still a policy choice. If it were not committed to meeting currency demand, it could control the supply of currency in circulation.

Moreover, at least part of the rise in the demand for currency since 2007 is due to the fact that those dollars purchase fewer goods than they did back in 2007. And they purchase fewer goods than they did back in 2007 because the Fed allowed (perhaps unintentionally) the money supply to grow faster than money demand. All else equal, slower reserve growth in 2020 and 2021 would have resulted in less inflation — and a smaller rise in the (nominal) demand for currency. Hence, by controlling reserves, the Fed exhibits some control over currency, as well.

Second, ample reserves present a risk, albeit a small one. While reserves may be ‘backed’ by US Treasuries, the two are not perfect substitutes, as they have different durations. This creates an interest risk that is affected by the size of the Fed’s balance sheet. This risk emerges precisely because the ample reserves regime enables massive balance sheet expansions, which are then exposed to shifting rate environments.

Third, to avoid a knife-edge equilibrium where a random shock might cause the operating regime to switch from ample to scarce reserves, the Fed must include a premium on the interest it pays on reserves. The Fed has been hesitant to approach the minimum viable level to keep reserves ample, suggesting it will ultimately pay a premium sufficient to maintain a sizable buffer. Waller is presumably aware of this hesitancy: after all, he dissented on the slowdown in balance sheet run off back in March. If the requisite premium is sufficiently large, the interest the Fed receives on Treasuries of similar duration will be less than the interest it pays on reserves. Hence, the Fed would have to choose to take losses on the transfers from Treasury to depository institutions or hold riskier assets to make up the difference.

Finally, there’s an overlooked institutional cost. In an ample reserves regime, banks don’t need to borrow from each other. With ample liquidity in the system, the overnight interbank lending market dries up. This removes the incentive for banks to monitor one another — a critical feature of a healthy financial system. In a scarce reserves environment, interbank lending encourages peer oversight, embedding valuable information in market pricing. Ample reserves dilute this mechanism.

Waller’s analogy is thoughtful but problematic. Clean water is safe — until it floods the system and undermines the very structures it was meant to support.