On March 24, Canada’s newly appointed Prime Minister Mark Carney called a snap election for April 28. If the economic record of his Liberal Party, which has been in office since Justin Trudeau’s victory in 2015, is a major factor in voters’ decisions, bookies would be giving you pretty long odds on them.
Gross Domestic Product (GDP) per capita is a key metric of economic performance which tells us how much per person is available to be consumed, invested, or put to some other use. Under the Liberals, Canada’s performance relative to its G7 peers has been miserable. As Figure 1 shows, between 2014 and 2023, Canadian GDP per capita grew by just 1.9 percent in real terms, the worst performance in the G7 and less than a third the growth in Germany, the next-worst performing country. Indeed, Canadian GDP per capita was lower in 2023 than it was in 2018.
Figure 1: Real per capita GDP growth, 2014 to 2023 (PPP, constant 2021 international $)
Source:World Bank World Development Indicators
What accounts for this dismal performance? GDP per capita is calculated by simply dividing total GDP by the population. Canada’s record on total GDP growth is relatively strong. Between 2014 and 2023, the Canadian economy grew by 15.3 percent in real terms, second only to the United States among the G7 countries, as Figure 2 shows. But while the numerator in our equation – GDP – has grown rapidly, so has the denominator, population. Between 2014 and 2023, Canada’s population grew by 13.2 percent, the fastest rate in the G7 and more than double that of the second-placed United Kingdom, as Figure 3 shows.
Figure 2: Real GDP growth, 2014 to 2023 (PPP, constant 2021 international $)
Source:World Bank World Development Indicators
Figure 3: Population growth, 2014 to 2023
Source:World Bank World Development Indicators
Given that the growth rate of GDP is just the sum of the growth rate of GDP per capita and the growth rate of the population, we can calculate that population growth accounted for 84.9 percent of the average annual growth of Canada’s total GDP between 2014 and 2023, the highest share among the G7 countries and 42.3 percentage points more than the country with the second biggest share, the United Kingdom. A decade of Liberal government in Canada has seen impressive growth of total GDP thanks to population growth – 88.1 percent of which between the fourth quarter of 2014 and the fourth quarter of 2024 came from immigration – but, in economic terms, the average Canuck isn’t much better off.
Canada’s productivity problem
This is because, as Paul Krugman wrote: “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” And Canada’s record on raising output per worker is poor. As Figure 4 shows, GDP per person employed increased, in real terms, by just 0.1 percent between 2014 and 2023, a rate better than only Japan among the G7 countries. This is not new. Among its G7 peers, Canadian GDP per person employed ranks fifth in every single year from 1990 onwards.
Figure 4: Real per worker GDP growth, 2014 to 2023 (constant 2021 PPP $)
Source:World Bank World Development Indicators
What accounts for this stagnation? A recent report by RBC, Canada’s biggest bank, offers some answers.
Regulations and red tape are a problem. RBC notes that “Canadian businesses invest substantially less than in the US—about half as much per worker in aggregate.” While “part of the slowing in investment has been from a pullback in investment in the Canadian oil and gas sector,” it explains that “businesses have also invested a substantially smaller share of GDP in the manufacturing sector in Canada than in the US over the last decade.” “The issue does not appear to be a lack of available funding,” it continues, but “an inefficient project approvals backdrop [which] is making investing in Canada relatively expensive.” RBC notes that, “In 2020, Canada ranked 188th out of 208 economies tracked by the World Bank on the number of days businesses spent dealing with construction permits for new projects. That is three times longer than time spent in the US.”
Regulations and red tape also retard trade domestically. “A patchwork of regulatory and administrative rules across different municipalities and provinces…restricts trade within Canada,” the report notes. Indeed, “The International Monetary Fund has estimated that internal trade barriers…cost the equivalent of a 20-percent average tariff between provinces. By comparison, the effective tariff rate collected on international imports from abroad in Canada is less than one percent.”
Trading across international borders is also relatively onerous. While “Actual tariff rates on international trade in Canada are low…Canada ranks poorly (51st globally) in the ease of trading across borders in large part due to high administrative costs associated with importing and exporting,” RBC writes.
Taxes are a problem too. “Canadian corporate tax rates are still comparable to other advanced economies,” RBC notes, “But taking into account the tax on company dividends at the personal income tax level, the total tax on distributed profits from Canadian companies is the highest in the G7, according to the OECD.”
Canadian economic growth has also been tilted toward sectors which have seen slow productivity growth. In the case of services this may be unavoidable, but, RBC write, “Construction is one of the industries that has struggled the most to boost productivity over time” and “Investment in residential structures accounts for twice the share of GDP in Canada (6 percent) than in the US (3 percent)…As a result, construction accounts for about twice the share of total hours worked in Canada (8 percent) as it does in the US (4 percent).”
Finally, “A large and growing public sector is less productive,” RBC note. “Canada’s large public sector education and healthcare industries are much less productive than in the US by 70 percent and 50 percent, respectively. and accounting (sic) for a fifth of the total economy productivity gap despite only accounting for 14 percent of the economy.”
Who gets to fix it?
Until early March, the Liberals looked certain to pay a heavy price for Canada’s poor economic performance, among other things, with polls showing Pierre Poilievre’s Conservatives with comfortable leads. Then, fortunes suddenly flipped and every poll since Carney’s election call has shown the Liberals in the lead. Conventional wisdom holds that the Canadians are rallying round the flag in response to President Trump’s bellicose statements, and conventional wisdom may be right. It is hard to see anything in Mark Carney which would generate such a turnaround.
Canada is not doomed to be an economic laggard. It is well placed geographically and blessed with abundant natural resources. But its next government, whoever heads it, will have its work cut out to reverse decades of economic underperformance.
In a recent defense of proposed tariffs, US Treasury Secretary Scott Bessent declared that “access to cheap goods is not the essence of the American dream.” The remark, presumably aimed at justifying protectionist trade policies, deserves careful scrutiny, not only because it risks redefining a long-standing ideal, but because it reflects an increasing drift away from foundational principles of free markets, consumer sovereignty, and individual liberty.
The American dream is not a prescriptive set of outcomes dictated by governments. It is the freedom of individuals to pursue happiness, prosperity, and personal fulfillment according to their own values, however lofty or insignificant that might be. For one person, that dream might involve building a small business. For another, it could mean owning a home, raising a family, or simply achieving a standard of living superior to that of previous generations. Any top-down claim about what is or is not “the essence” of that dream implies a collectivist redefinition — one that elevates nationalistic or ideological goals above the lived experience and preferences of individuals.
From a classical liberal standpoint, the power (and perhaps the true ‘essence’) of the American dream lies in its decentralization. It is not a centrally administered scheme of moral aspiration, but a spontaneous order that emerges from free exchange, open markets, and self-directed human action. If low-cost, high-quality goods — whether they are electronics, food, or household items — enable millions of Americans to save, invest, and allocate their personal resources more efficiently, it is presumptuous and economically incoherent to suggest that those choices are somehow inauthentic or unworthy of a citizen’s aspirations.
Second, access to affordable goods is a cornerstone of economic freedom and human flourishing. The ability to stretch one’s income further, especially in a period of inflation and wage stagnation, is not trivial. It enables upward mobility, promotes entrepreneurship, and allows for capital accumulation: all conditions essential to what economists would recognize as long-term increases in real living standards. Milton Friedman, Friedrich Hayek, EC Harwood, and countless other defenders of market economies have long emphasized that prosperity flows not from the benevolence of producers or bureaucrats, but from voluntary exchange and competition.
Moreover, falling prices are not simply a consumer preference — they are an indication of rising productivity, quite possibly the most vital engine of prosperity in the history of mankind. When firms innovate, streamline production, and specialize, they are able to produce more with less.
That process generates real wealth — not the illusory growth of fiscal or monetary stimulus programs. The cascading effects of producing more goods and services per unit of input — whether through faster output growth than input use, or rising output with stable or declining inputs — are profound: longer life expectancies, lower infant mortality, improved public health, the unlocking of previously untapped human capital, and beyond. Far from incidental, they are the hallmarks of a thriving society. And it must be said clearly that outsourcing labor to parts of the world with lower wages and compensation expectations is just as much a productivity gain as technological innovation or other forms of operational efficiency. To view lower prices as a trivial or optional component of the American experience is to fundamentally misunderstand the connection between market dynamism and human progress.
In his essay “Do Real-Output and Real-Wage Measures Capture Productivity Growth?” William Nordhaus uses the history of lighting to show how official economic statistics drastically underestimate the productivity growth. By comparing the cost of light from ancient oil lamps to modern compact fluorescents, he finds that the true productivity of lighting increased by a factor of about 900,000 over the past two centuries — far greater than what standard price indexes suggest. His ultimate conclusion is that official measures may miss vast improvements in consumer well-being and technological progress, especially over long time horizons. Had barriers to trade — tariffs or other restrictions on the exchange of goods, services, know-how, or ideas more broadly — been erected at any point along the way, much of that extraordinary growth would likely have been delayed and perhaps never realized.
Protectionist policies that artificially raise prices undermine efficiencies by distorting price signals and shielding domestic firms from competitive pressures. That is nothing less than crony capitalism wearing a mask of economic patriotism, and it most certainly does not “make America great again.” Tariffs also function as a regressive tax, disproportionately impacting lower- and middle-income consumers who spend a higher percentage of their income on tradable goods. The irony could scarcely be thicker: in the name of defending the American worker, the state imposes costs on that very worker’s grocery bill, clothing budget, and ability to afford modern technology.
Behind the availability of cheap goods is an intricate global web of specialization and comparative advantage. When nations focus on producing what they are relatively best at and trade freely, wealth is maximized for all parties. This is not some wonkish theory — it is the lived experience of the post-World War II economy, where trade liberalization has lifted billions out of poverty and allowed consumers in poor and wealthy countries alike to access goods that would otherwise be unaffordable or wholly unavailable. To reject this on nationalistic grounds is not only economically shortsighted but morally suspect.
The very idea that consumer access to affordable goods is somehow trivial or un-American betrays a condescending view of economic agency. It assumes that policymakers know better than consumers themselves what constitutes a fulfilling, meaningful life. In a free society, it is individuals — not governments, and certainly not Treasury Secretaries — who, via the market, determine what goods, services, and life paths are worth pursuing. Whether an American family spends its savings on travel, education, games, events, or simply better groceries is not for the state to judge or manipulate.
Telling the American people — especially after four years of the highest inflation in four decades — that they should endure even higher prices for an experiment attempting to replicate the economic conditions and state of the world at a particular point in time is nothing less than collectivism. If anything, the government’s role should be to protect the institutions that secure property rights and unfettered markets. When officials begin to redefine the American dream in ways that justify inflationary or restrictive policies, it should raise alarms.
The American dream is not a slogan. Nor is it a sacrifice to be coerced at the altar of political narratives. It is the right to choose, to buy, to trade, and to live according to one’s own values. And it is the simultaneous right for businesses, whether proprietorships or multinational corporations, to seek efficiencies wherever in the world they find them. Pursuant to those, access to affordable goods, through free and open markets, is not only central. It is, contra Bessent, essential.
The French Enlightenment is often referred to as the Age of Reason. This period produced some of humanity’s greatest natural scientists, including Antoine Lavoisier, the pioneer of modern chemistry; Joseph-Louis Lagrange, whose contributions to number theory are well known, particularly in economics; and Pierre-Simon Laplace, a foundational figure in probability theory. But as Friedrich Hayek pointed out, “modern socialism and that species of modern positivism, which we prefer to call scientism, spring directly from this body of professional scientists and engineers which grew up in Paris.”
While Paris significantly contributed to the natural sciences, laying the foundations for many discoveries that improved human life, it also gave rise to modern socialism and scientism. How did this paradox emerge? To answer this question, we must examine one institution: the École Polytechnique.
L’École Polytechnique
Hayek, in The Counter-Revolution of Science, referred to the École Polytechnique as “The Source of the Scientistic Hubris.” Founded in 1794 during the French Revolution and later favored by Napoleon for training engineers and military personnel, this institution was a product of revolutionary ideals. The intellectuals of that time believed that education should focus exclusively on the sciences, relegating humanities, religion, Latin, and literature to an inferior status. These subjects were seen as outdated and unworthy of serious academic attention. This mindset is encapsulated in the writings of Henri de Saint-Simon, who observed: “In those not distant days, if one wanted to know whether a person had received a distinguished education, one asked: ‘Does he know his Greek and Latin authors well?’ Today one asks: ‘Is he good at mathematics?’”
The École Polytechnique trained some of the nineteenth century’s greatest mathematical and scientific minds, such as Siméon Denis Poisson (known for the Poisson distribution), Benoît Clapeyron (famous for the Clapeyron equation), and Joseph Liouville (recognized for Liouville’s theorem). Even Bernard Arnault, one of the wealthiest individuals of his day, studied at this institution. As Hayek keenly observed, however, problems arose when these highly skilled technical specialists ventured into the realm of the social sciences.
The Council of Engineers of the Human Soul
The story begins with the entry of these technical minds into the social sciences. They sought to understand human society using the same methods applied to the natural sciences. If the scientific method had successfully explained the physical world, why not apply it to human society? What could possibly go wrong?
This is where Henri de Saint-Simon emerges as a key figure. A man who first accumulated wealth through banking and financial speculation, Saint-Simon later turned his attention to the sciences in 1798, using his fortune to acquire scientific knowledge. He developed close relationships with the students and professors of the École Polytechnique, driven by a strong belief in “pure science” — not only for understanding the natural world but also for organizing society. His journey to Geneva proved significant in this respect, as he proposed a radical project known as the Council of Newton.
This council, which reads like a plot from a science fiction novel, was to be composed of twenty-one members: three physicists, three chemists, three mathematicians, three physiologists, three litterateurs, three painters, and three musicians. The entire human race would vote for the members, and the mathematician who received the most votes would serve as the council’s president. This body would act as the representative of God on earth, effectively replacing the Pope. Saint-Simon envisioned this supreme council directing all human labor, and he suggested that anyone who disobeyed its directives should be treated as a quadruped. This concept of central planners engineering society according to their superior knowledge laid the foundation for communism, which later took its horrific historical shape.
This vision represented a new form of religion, as Lord Acton famously remarked: “The age preferred the reign of intellect to the reign of liberty.” The Saint-Simonian view of science was one without limitations — where the same methodology should be applied regardless of whether one was studying a simple physical phenomenon or a complex social system. The ultimate goal of the social sciences, in their view, was not to describe society, but to control and predict it. As Saint-Simon put it, “We must examine and coordinate it all from the point of view of Physicism.” This dangerous illusion was later echoed by Stalin, who saw writers as “engineers of human souls.”
The Problem of a Free Society
It is crucial to recognize that the problems faced by a free society are not technical in nature. They cannot be solved by technical experts armed with sufficient knowledge and data. Social phenomena involve variables that interact in complex and unpredictable ways. Unlike the physical sciences, where a few key variables often determine outcomes, the social sciences deal with dispersed knowledge that no single individual or group can fully comprehend. There are no constants or stationary relationships — only patterns.
Because of these limitations, what we need is what Frank Knight — described by Hayek as “the most distinguished living economist-philosopher” — termed “governance by discussion.” Political and economic institutions should be designed to harness decentralized knowledge, allowing individuals to contribute their own unique bits of information. A free society is one of constant discovery, adaptation, and knowledge acquisition. Hayek summarized the role of social science as follows: “The characteristic problems of the social sciences seem to me to arise out of the fact that neither acting man nor the social scientist can ever know all the facts which determine human action, and that the problem of the social sciences is essentially how man copes with this essential ignorance.”
The Importance and Limits of the Social Sciences
The scientistic hubris of the engineers from the École Polytechnique serves as a reminder of both the importance and the limitations of the social sciences. The technicians who believed society’s problems could be engineered away ignored a fundamental insight from the Scottish Enlightenment thinkers: institutions are products of human action, not human design. Hayek cautioned against the narrow technical specialist, who “was regarded as educated because he had passed through difficult schools but who had little or no knowledge of society, its life, growth, problems, and its values, which only the study of history, literature, and languages can give.”
As Hayek warned, social science is not merely about technical expertise but about understanding the complex interplay of social forces, and an acknowledgement of diverse human values and experiences.
The Dollar Milkshake Theory, a growing topic of debate on YouTube, Reddit, and other social platforms, claims to offer a framework for explaining the US dollar’s strength in an era of expanding liquidity. It posits that global liquidity injections — largely a product of excessive monetary easing by central banks — are ultimately siphoned into US assets, strengthening the dollar and exerting deflationary pressure on weaker currencies.
While there are elements of truth to this framework, the theory is fundamentally flawed. It assumes that distortions caused by state intervention are not just inevitable but permanent, and it ignores the long-term economic consequences of financialization generated by artificial credit expansion. Moreover, it misreads the actual trajectory of global monetary dynamics, particularly as dedollarization gains traction in response to America’s fiscal mismanagement and weaponization of its currency.
Artificial Liquidity and Malinvestment
At its heart, the Dollar Milkshake Theory relies on the notion that the Federal Reserve’s policies will always create an economic environment where capital is drawn disproportionately to US assets. Even if this is the case, it is not a feature of the markets or superiority, but a function of expansionary monetary policy distortions. A constant supply of artificially cheap credit and market interventions have created a global economic order in which capital is allocated not based on productivity, innovation, or comparative advantage, but instead on the relative ease of financial arbitrage within a system dominated by the Fed and other major central banks.
It’s an arrangement that leads to severe malinvestment, where capital flows not to where it is most efficient, but rather to where it is temporarily most attractive due to manipulated interest rates and financial repression. Instead of productive investment in industries that drive organic economic growth, we see speculative bubbles: artificial intelligence stocks, real estate, US Treasuries, Pokemon cards, non-fungible tokens, and beyond. The problem is not only that bubbles shunt investment away from more deserving areas, but that they are not sustainable in the long run — the moment the Fed reverses its expansionary policies, or the global financial system starts restructuring, these flows will dry up, leading to painful unwinding of the imbalances.
The Fragility of Dollar Hegemony
Another core weakness in the Dollar Milkshake Theory is its assumption that the dollar will remain permanently dominant because global institutions and sovereign entities have no alternative. This is a mistake. Markets, when allowed to function properly, do not tolerate monopolies indefinitely. Just as inefficient businesses lose market share to more competitive firms, inefficient financial structures give way to more viable alternatives. The current trajectory of global trade and finance suggests that dedollarization is not just theoretical — it has begun.
China, Russia, and a growing coalition of emerging markets have been actively reducing their dependence on the US dollar in trade settlements. The rise of currency swaps, central bank digital currencies (CBDCs), and alternative trading mechanisms (such as BRICS’ push for a commodity-backed reserve currency) all suggest that the dollar’s hegemony is not guaranteed. Additionally, the US government’s willingness to use the dollar as a tool of financial coercion — sanctions, asset freezes, and trade restrictions — has accelerated global efforts to diversify reserves away from the greenback. While the milkshake theory assumes that dollar dominance is reinforced through financial gravity, other spheres have their own gravity, which is pulling toward alternatives.
Monetary Competition
A better solution is not an unchallenged dollar absorbing global liquidity, but a monetary system where currencies compete freely. The current dollar-dominant system is not the result of market forces but of decades of government privilege—Bretton Woods (1944), the informal but consequential petrodollar agreement, and decades of Federal Reserve intervention. (If President Trump has his way, sanctions against nations using anything but the dollar may soon be in place.) In a truly free market, money would emerge naturally through competition, and its value would be determined by its qualities as a medium of exchange, a store of value, and a unit of account — not through financial engineering and central bank intervention.
Gold, Bitcoin, and commodity-backed currencies are potential competitors to the dollar that have been suppressed or marginalized by policy-driven mechanisms. While the Dollar Milkshake Theory acknowledges the capital-absorbing nature of the dollar, it fails to recognize that this phenomenon is itself a symptom of financial repression, rather than market efficiency. A free market would correct these distortions by allowing alternative currencies to emerge and compete without state-imposed barriers.
To its credit, the Dollar Milkshake Theory correctly observes that the short-term appeal of US assets is frequently a product of the conditions set by global monetary easing. That fails, however, as a long-term economic model. Distortions created by government intervention are sticky and lead to instability and correction. More critically, it ignores the growing move toward dollar alternatives, an inevitable consequence of free-market forces working against rigging and coercion.
Economic freedom is not defined by an endlessly dominant dollar, but rather a world wherein monetary competition is allowed — indeed, encouraged — to flourish. The global economy is already moving in that direction, and the longer investors and policymakers rely on the outdated assumptions of dollar hegemony, the more painful the transition will ultimately be. Half-baked theories will only compound the eventual cost.
The minimum wage is one of the most frequently debated economic policies of the modern era. Advocates argue that it protects low-income workers from exploitation and ensures a livable wage. Critics contend that it distorts labor markets, reduces employment opportunities, and can contribute to inflation.
This explainer offers a comprehensive analysis of the minimum wage, exploring its history, mechanics, intended goals, and real-world economic impact. We will also examine common criticisms and misconceptions about the minimum wage from a free-market perspective.
The History of the Minimum Wage
The idea of a government-mandated minimum wage first emerged in the late nineteenth and early twentieth centuries, under the ideological sweep now known as the Progressive Era. New Zealand was the first country to implement a national minimum wage (1894), followed by Australia (1907). In the United States, the minimum wage became law with the Fair Labor Standards Act (FLSA) of 1938, which set a national wage floor of $0.25 per hour (about $5.50 in 2024 dollars). The law aimed to prevent employers from paying substandard wages, particularly during the Great Depression.
Over time, the US minimum wage has been adjusted repeatedly, both in nominal terms (actual dollars and cents) and in response to inflation (to adjust for lost purchasing power). Many other countries have taken similar steps, though the specifics vary widely. Some nations, such as Switzerland and Sweden, have no statutory minimum wage, instead relying on industry-specific wage agreements negotiated through collective bargaining.
How the Minimum Wage Works
At its core, a minimum wage law establishes a legally binding floor on wages, meaning employers cannot pay workers below a certain hourly rate. Certain employers may be exempt from minimum wage laws, such as small businesses with fewer than a specified number of employees, those hiring seasonal or agricultural workers, and family-owned businesses where only immediate relatives are employed. Additionally, exceptions often apply to tipped workers, student workers, and certain disabled employees under specialized wage programs, allowing employers to pay below the standard minimum wage under specific conditions.
The intent, as typically stated, is to ensure that even the lowest-paid jobs provide a basic standard of living. The minimum wage does not operate in a vacuum, however. Its effects depend on broader economic conditions, labor market dynamics, and the relative bargaining power of employers and employees. When a minimum wage is set above the market equilibrium rate—the wage at which supply and demand for labor naturally balance—it can lead to unintended consequences, such as reduced employment opportunities and increased automation.
The economic explanation is found in the graph below:
When a minimum wage (Pmw) is set above the market equilibrium wage (P*), a labor surplus is generated. At the equilibrium price (P*) and quantity (Q*), labor supply and demand are balanced. However, at the higher mandated wage (Pmw), the quantity of labor supplied (Qs) exceeds the quantity of labor demanded (Qd), resulting in excess labor—commonly referred to as unemployment. The discrepancy reflects the reduced hiring incentives for employers and the increased willingness of workers to enter the labor market at the elevated wage level.
The Minimum Wage in the United States
In the United States, the federal minimum wage is set by Congress and applies to most workers covered under the Fair Labor Standards Act (FLSA). As of 2024, the federal minimum wage remains at $7.25 per hour, a level unchanged since 2009. Individual states, however, have the authority to set their own minimum wages above the federal level, and many have done so to reflect local cost-of-living differences. As of March 2025, the highest state minimum wage is in Washington, at $16.28 per hour, while the lowest federal level remains in states that have not enacted their own higher wage laws. Some cities, such as Seattle and San Francisco, have implemented even higher local minimum wages.
Employers are legally bound to comply with the highest applicable wage—whether federal, state, or local—ensuring that workers receive the maximum legally mandated amount in their jurisdiction.
What the Minimum Wage Actually Does
Economists have extensively studied the effects of minimum wage laws, and findings indicate that the policy often comes with trade-offs. Here are some of the primary impacts of a minimum wage:
Sets a Floor on Labor Costs
A legally mandated minimum wage forces employers to pay at least a specified amount, regardless of the productivity or skill level of the worker. When businesses are legally mandated to pay higher wages, they may compensate by reducing other forms of compensation, such as benefits, bonuses, or training opportunities. Furthermore, industries with low profit margins (retail, food service, hospitality) are disproportionately affected, as they rely heavily on low-wage labor. These increased labor costs result in higher prices for consumers, potentially offsetting the intended benefits of wage increases.
Reduces Employment
When a minimum wage is set above the market rate for specific jobs, it creates a price floor that can lead to labor surpluses—commonly referred to as unemployment. Employers may find it too costly to hire as many workers as they otherwise would, particularly those in entry-level or low-skilled positions. This is especially concerning for small businesses, which often operate on tight budgets and cannot absorb higher wage costs as easily as large corporations. Empirical studies on this issue have produced mixed results, but many show that increasing the minimum wage leads to job losses, particularly among young and less-experienced workers. Over time, this effect can contribute to higher structural unemployment and reduced workforce participation.
Incentivizes Employers to Hire Fewer Workers and Work Them Harder
To maintain profitability amid rising labor costs, employers often adjust their workforce strategy by hiring fewer employees and increasing the workload of those who remain. This means existing workers may face greater job demands, longer shifts, and increased pressure to be more productive. While some employees may appreciate the extra hours, others may experience burnout, stress, and reduced job satisfaction. Additionally, businesses may shift toward employing fewer full-time workers and instead rely on part-time or temporary staff to reduce costs. This can make it more difficult for employees to secure stable, long-term employment with non-wage benefits such as health insurance and retirement contributions.
Encourages Automation
As the cost of human labor rises, businesses have a stronger incentive to invest in automation to perform tasks previously done by low-wage workers. This trend is particularly evident in industries like fast food, retail, and manufacturing, where self-checkout kiosks, robotic food preparers, and automated customer service software are increasingly replacing human employees. While automation can improve efficiency and reduce business costs, it also reduces opportunities for low-skilled workers to gain entry-level jobs that provide essential work experience. Over time, this shift can exacerbate income inequality by favoring highly skilled workers who design and maintain automated systems, while eliminating opportunities for those with fewer skills.
Distorts Market Signals
In a free-market economy, the price of labor functions as a key signal to allocate labor resources efficiently. When wages are artificially set above equilibrium levels, businesses and workers receive distorted signals about labor supply and demand. For example, high minimum wages can lead to an oversupply of workers seeking jobs that no longer exist, while discouraging investment in industries that might otherwise create more employment opportunities. Furthermore, businesses may relocate operations to regions with lower labor costs or invest in outsourcing, reducing domestic job availability. These distortions lead to unintended consequences and inefficiencies, such as labor shortages in specific sectors and persistent unemployment in others.
Hurts Marginal Workers the Most
One of the most concerning effects of high minimum wages is their disproportionate impact on marginal workers—those with the least experience, lowest skill levels, or the greatest barriers to employment. Young workers, immigrants, and individuals with limited education often struggle the most to secure jobs when wage floors are high, as employers prioritize hiring more experienced or highly skilled workers. This can create long-term economic disadvantages, as job seekers are unable to gain the experience necessary to move up the career ladder. Additionally, minority and disadvantaged communities are often hit hardest by minimum wage hikes, as they tend to have higher unemployment rates and greater dependence on low-wage jobs for workforce entry.
Ignores Business Heterogeneity
A mandated minimum wage assumes a one-size-fits-all approach to labor costs, ignoring the vast differences in business structures, profit margins, and financial resilience across industries. A large multinational corporation can often absorb higher wage costs with relative ease, while small businesses with lower revenue streams may struggle to remain viable. This disparity can trigger market consolidation, where only larger firms survive, reducing competition and innovation. Additionally, regional cost-of-living variations make a federal wage policy particularly problematic, as a rate that is feasible in a high-cost metropolitan area may be unsustainable in a rural town.
Variables Affecting the Impact of a Minimum Wage
The economic impact of a minimum wage increase depends on several key variables. One of the most important factors is the size of the jump from one increase to the next. When minimum wages (labor costs) rise significantly over a short period, businesses have less time to adapt, which can lead to employment reductions, automation, or price increases. Another factor is the frequency of increases; more frequent but smaller adjustments can allow employers to gradually adapt, whereas infrequent but large jumps tend to create economic shocks. Finally, the gap between the prevailing average wage in a state or locality and the new minimum wage is critical. If the minimum wage is already close to the median wage, the impact on employment is likely to be small. However, if the minimum wage is significantly higher than what many workers currently earn, businesses may struggle to absorb the cost increases, leading to job losses or cutbacks in hours. These variables shape how disruptive a given minimum-wage policy is to labor markets.
The Card Krueger Findings
One of the most well-known studies on the minimum wage was conducted by economists David Card and Alan Krueger in the early 1990s. Their research examined the impact of a minimum wage increase in New Jersey’s fast-food industry, comparing employment changes to neighboring Pennsylvania, where the minimum wage remained unchanged. Their findings suggested that, contrary to conventional economic theory, the wage increase did not lead to a reduction in employment and may have even slightly increased job numbers.
While Card and Krueger’s study has been widely cited by minimum-wage proponents, its findings are highly context-dependent. The study focused on a specific industry (fast food) in a limited geographic region and covered a relatively modest wage increase ($0.80). Additionally, factors such as local labor market conditions, employer responses, and data-collection methods have been subjects of debate. Later research, using more comprehensive datasets and improved methodologies, has produced mixed results, with many studies confirming that higher minimum wages tend to reduce employment, particularly among low-skilled workers. Thus, while Card and Krueger’s findings contribute to the discussion, they do not establish a universal principle applicable to all minimum wage increases.
Common Assertions Regarding Minimum Wage Laws
“Raising the minimum wage will reduce poverty.”
While higher wages benefit those who remain employed, job losses among the least skilled workers often offset these gains. Moreover, many low-wage workers are not in poverty (e.g., teenagers from middle-class families), and many impoverished individuals do not work at all. Direct cash transfers, earned income tax credits, and job-training programs are often more effective poverty-reduction tools.
“Minimum wage increases boost the economy by increasing worker spending.”
Although higher wages may increase spending for some workers, the net economic impact is unclear. Higher labor costs force businesses to raise prices, cut jobs, or reduce investment, which can counteract any demand-side stimulus. Moreover, mandated wage hikes do not create new wealth—they simply redistribute it, often inefficiently.
“Businesses can easily absorb higher wages by reducing profits.”
Many small businesses operate on thin profit margins and cannot simply absorb higher wages without making other adjustments. Large corporations may be better positioned to handle wage hikes, but small businesses—which employ a significant portion of the workforce—may struggle to remain viable.
“Raising the minimum wage will reduce reliance on government assistance.”
While some workers may rely less on social welfare programs after a wage increase, others will lose jobs or see their hours cut, potentially increasing their need for assistance. Additionally, higher wages do not address underlying issues such as high living costs or a lack of affordable housing.
“Other countries have high minimum wages without major job losses.”
Countries with high minimum wages often have other policies that offset their impact, such as lower payroll taxes, less-restrictive labor regulations, or stronger apprenticeship programs. Moreover, countries with stronger productivity growth can sustain higher wages without adverse employment effects.
The idea that a legislated wage floor ensures fairness ignores that wages naturally adjust to reflect worker productivity. In competitive labor markets, employers must offer wages that attract and retain employees. If a worker’s productivity does not justify the minimum wage, employers are incentivized to automate or eliminate the role entirely, reducing opportunities for low-skilled workers.
“The minimum wage helps lift low-income workers out of poverty.”
While higher wages help some workers, minimum wages often lead to job losses, particularly for young and inexperienced employees. Rather than lifting people out of poverty, a minimum wage increase can push marginal workers into unemployment, and trap others by removing the bottom rung of the employment ladder. Targeted policies such as the Earned Income Tax Credit (EITC) are more effective in assisting low-income workers without distorting labor markets.
“Minimum wages stimulate consumer spending, and workers with higher incomes are likely to spend more, boosting demand in the economy.”
Though higher wages may increase individual spending, the broader economic impact cannot be ignored. Employers facing higher labor costs may offset these expenses by reducing jobs, cutting hours, or raising prices. The net effect can neutralize or even reverse any perceived boost in overall consumer spending.
“By setting a higher wage floor, minimum wages may reduce worker exploitation and turnover.”
While higher wages may reduce turnover, they also lead employers to increase workloads for existing employees and impose stricter hiring requirements. This disproportionately harms low-skilled workers who rely on entry-level jobs as stepping stones to better employment. A freer labor market allows for more diverse job opportunities and career progression.
“Raising the minimum wage lifts the earnings of the lowest-paid workers, thereby reducing income inequality.”
Artificially raising the wage floor compresses the wage distribution, but does not address underlying skill gaps or barriers to upward mobility. Instead, it discourages investment in workforce training and makes it harder for low-skill and entry-level workers to gain employment. Economic growth driven by innovation and productivity gains is a more sustainable way to reduce inequality than wage mandates.
While outside the main focus of this discussion, it’s worth briefly considering whether the wage gap merely reflects variations in skill, experience, and other factors, and if efforts to narrow it might unintentionally cause more harm than benefit.
Recent Findings
Recent studies have examined the effects of minimum wage increases on various demographic groups, including young people, individuals with low skill levels, and minorities. Key findings include:
General Employment Effects: A comprehensive meta-analysis by Neumark and Shirley (2021) found that 79.3 percent of studies reported negative employment effects following minimum wage hikes, with the impact being more pronounced among teens, young adults, and less-educated workers.
Impact on Young Workers: Research by Kalenkoski (2024) indicates that minimum wage increases can lead to reduced employment opportunities for young, unskilled workers. A separate study highlighted that a 10 percent increase in the minimum wage could result in a decrease in employment rates among this group.
Effects on Low-Skilled Workers: Newmark (2018), focusing on the least-skilled workers, finds strong evidence that minimum wage increases can lead to job losses in this demographic.
Influence on Minority Employment: National Bureau of Economic (NBER) research suggests that race differences in employment effects of minimum wages could be more pronounced when considering low education and skill levels. The study specifically found evidence that higher minimum wages led to greater job losses among black workers compared to other racial groups.
On-the-Job Training Reduction: A study by Neumark and Wascher found that a 10 percent increase in minimum wages decreased on-the-job training for young people by 1.5 to 1.8 percent, potentially hindering skill development and future earnings.
These findings underscore the complex and varied impacts of minimum wage policies across different segments of the labor market. Pushing on one economic lever has varied effects, many of them unintended.
Conclusion
The minimum wage remains a contentious policy. While well-intended in its aim to protect workers and alleviate poverty, a minimum wage generates significant trade-offs that should not be ignored. Minimum wages artificially raise labor costs, which can lead to unintended economic distortions, including reduced employment opportunities, increased automation, and higher consumer prices. Small businesses, which often operate on thin profit margins and for which labor comprises a high percentage of total operating expenses, are particularly vulnerable to these changes and may be forced to lay off workers or reduce hiring.
Additionally, minimum wage laws disproportionately harm those they are intended to help, such as young, low-skilled, and minority workers, by making it harder for them to gain entry-level employment. Employers facing increased wage costs often respond by cutting hours, eliminating benefits, or raising performance expectations, which can make work more demanding without necessarily improving overall job satisfaction. Rather than fostering broad-based prosperity, rigid wage floors risk excluding the most vulnerable from the workforce altogether.
Before Trump’s re-election in November 2024, progressive commentators often advocated higher US tariffs to achieve three overlapping goals: improve jobs and wages for workers; boost the manufacturing sector; and reduce US trade deficits. A few populist commentators on the right voiced the same agenda. But President Trump’s chaotic tariff proposals since his inauguration far exceed the prescriptions of policy advocates outside the president’s inner circle. With that context in mind, it’s worth summarizing what tariff advocates say, now that Trump’s agenda dominates the headlines.
AFL-CIO
For decades, the nation’s premier labor organization has opposed nearly all trade agreements and has endorsed restrictions on manufactured imports, such as autos (strict rules of origin in the USMCA), steel and aluminum (Trump 1.0 tariffs). But AFL-CIO President Liz Shuler issued the following statement in response to Trump’s tariffs against Canada and Mexico:
While we support the targeted use of tariffs to protect workers from unfair competition, the Trump administration’s blanket tariffs run the risk of causing unnecessary economic pain for America’s workers without addressing workers’ core economic priorities. The tariffs on Canada are particularly damaging…
Representative Marcy Kaptur (D-OH)
Rep. Kaptur is the longest-serving Congresswoman (since 1983). She was a strident opponent of NAFTA, and supports tariffs on manufactured imports, particularly steel. But Kaptur has energetically opposed Trump’s tariffs on the House floor and in the media. This is one quote from BlueSky:
The Trump Administration’s imposition of a 25% tariff on US-Canada trade will severely impact jobs and companies in the Great Lakes region, including across Northwest Ohio. Canada is our best trading partner and these unneeded tariffs are about to raise your prices on everything.
[image or embed]— Marcy Kaptur (@repmarcykaptur.bsky.social) March 4, 2025 at 10:14 AM
Kaptur urges Trump to focus his tariffs on China and other countries that run large trade surpluses with the US.
Lori Wallach, American Civil Liberties Project
As a leader in the litigation group Public Citizen, Lori Wallach founded and directed the Global Trade Watch in that organization. Currently she is director of the Rethink Trade program at the American Civil Liberties Project. In these roles, Wallach fought against NAFTA, the WTO, and the TPP. In her own words, “I opposed corporate-rigged trade deals/hyperglobalization and supported industrial policy before it was cool.”
Wallach’s views are largely posted on videos and YouTube appearances. Here is an excerpt from a recent interview:
Tariffs are part of the formula of the tools you use to try and reestablish our ability to make things here that we need and create good jobs for the two-thirds of Americans who don’t have a college degree, so making solar panels, medicine, EVs… But slapping on tariffs on Mexico and Canada, ostensibly about migration and drug trafficking, is not just ineffective — I mean, it’s like trying to do surgery with a saxophone instead of a scalpel — but also is going to be damaging. It’s going to cause enormous disruption, but without any of the outcomes and goals that one might actually want to use a tariff to achieve to help working people or build our resilience.
Economic Policy Institute
The Economic Policy Institute (EPI) has long criticized trade agreements and advocated tariff protection for the manufacturing sector. Thea Lee, a recognized progressive voice on trade issues, was president of the EPI from 2017 to 2021 before serving as Deputy Undersecretary for International Labor Affairs in the Department of Labor from 2021 to 2025. Lee and EPI chief economist Josh Bivens have shaped the EPI’s trade agenda.
In February 2025 (updated in March 2025), EPI published a “Fact Sheet” on tariffs with extensive comments on Trump’s agenda. Key excerpts:
Tariffs can do a number of useful things…[But h]igh and broad-based tariffs [cannot] fix the US trade deficit or rebuild manufacturing employment…mostly because high and broad-based tariffs will also reduce exports along with imports, and this will leave the balance of trade mostly unchanged.” Moreover, “American households will bear most of the burden of higher tariffs. This will mostly come through higher prices for imported goods and, crucially, higher prices for domestic goods that compete with imports.”
Tariffs should not become a significant revenue source for government spending because, “Tariffs are essentially a tax on consumption and are, hence, more regressive than most current federal revenue sources.”
And to conclude, “Narrow, strategic tariffs can be a useful tool. Trump’s broad-based, chaotic tariffs would cost consumers in every state.”
Clyde Prestowitz, Economic Strategy Institute
Founder of the Economic Strategy Institute, Prestowitz served in the Reagan Administration as a Counselor to the Secretary of Commerce. Along with over 130 former Republican officials, in 2020 Prestowitz signed a statement indicating Trump was unfit to serve another term in office. Prestowitz advocates high tariffs on manufactured goods as a pro-growth policy, argues that the economics profession has wrongly castigated the Smoot-Hawley Tariff of 1930, and contends that liberalizing trade with China was an historic mistake. But Prestowitz severely criticizes Trump’s tariff agenda for targeting Mexico, Canada, and the European Union.
Michael Pettis
A finance professor at Peking University and a senior fellow at the Carnegie Endowment for International Peace,Pettis published an article in Foreign Affairs shortly after Trump’s election, titled “How Tariffs Can Help America”. Arguing that economists distilled the wrong lesson from the Smoot-Hawley Tariff of 1930, Pettis contends that high tariffs today could depress consumption, increase savings, and thereby improve the US trade balance, especially in manufactured goods. Accordingly, he sees tariffs as a policy tool to boost growth and raise American living standards.
But reflecting on Trump’s proposal for uniform 10 percent or 20 percent tariffs, Pettis posted this comment on X:
Actually I think across-the-board import tariffs, if properly implemented, can indeed reverse the US role in accommodating global savings and trade imbalances, but as I’ve said many times before, they are the least efficient way, in part because they are very blunt…
In March 2025, Pettis had this to say about Trump’s tariff agenda:
For now, I don’t think Trump’s tariffs will have much impact on the overall US trade deficit, which I expect to be as large this year as it was last year. It is only once the US takes serious systemic steps to reduce its trade deficit that real trade disruption will occur.
Oren Cass, American Compass
Founder and Chief Economist of the conservative American Compass, Oren Cass ranks among the most avid defenders, outside the White House circles, of Trump’s tariff agenda. Like other right-of-center populists, Cass sees the decline of manufacturing jobs as an American calamity:
I think what we are seeing in the US economy today is sort of a fundamental disorder that is a function of saying that manufacturing just doesn’t matter, that we don’t need to make anything. We can have our iPhones designed in California and it doesn’t matter where they’re actually produced.
Writing in the Washington Post in February 2025, Cass declared,
For all the lamentations about President Donald Trump’s unconventional volley of tariff threats over the past week, the result is remarkably sane — approaching ideal.
No duties had actually been imposed on imports from Mexico or Canada, though both countries stepped up their border controls, but “Trump has delivered [tariffs against China] with a precision strike, refuting claims that tariffs cannot be done well.”
Bipartisan Dissent from Bad Ideas
Among the progressives sampled, no enthusiasm can be found for Trump’s tariff agenda. The same is true of three left-of-center Washington policy institutes: the Center for American Progress, the Institute for Policy Studies, and Third Way.
Progressives are distressed by threatened tariffs on Canada and Mexico, and are visibly concerned about the regressive cost-of-living impact Trump’s agenda will have on lower-income households. Beginning with the NAFTA debate during the Clinton Administration, progressive voices provided the ideological foundation for a high tariff agenda, but they are far from pleased with Trump’s implementation.
Populist conservatives cited in this blog are a mixed bag. All three favor high tariffs on the manufacturing sector, believing that cheap consumer goods are a false objective, and are very critical of China’s industrial prowess. But only Oren Cass truly embraces Trump’s tariff agenda. On April 2, 2025, Trump will reveal his falsely labeled “reciprocal” tariffs, seemingly designed to confront every US trading partner with higher tariffs. Trump has designated April 2 as “Liberation Day.” The verdict of progressive and populist tariff advocates remains to be seen.
Economists have extensively analyzed Trump’s latest trade war, examining both the Econ 101 effects of tariffs and the more underrated consequences of policy uncertainty. But there’s another critical angle worth exploring: the dynamics of interventionism suggest that government responses to the fallout from this trade war will likely trigger a cascade of additional interventions, ultimately worsening our economic problems.
Unsurprisingly, one of the first major policy decisions of Trump’s second administration has been to impose tariffs on a wide range of imported goods. Protectionism has been one of Trump’s most consistent policy positions since his first term. Despite this consistency in rhetoric, considerable uncertainty remains about the precise implementation of protectionist policies under Trump 2.0. This uncertainty itself creates pernicious effects for businesses and trade relationships, compounding the already-negative impacts of tariffs.
While specific trade policies may be difficult to predict, the concept of the “dynamics of interventionism” gives us a framework to anticipate how these policies will unfold. This concept, originating with economist Ludwig von Mises and further developed by contemporary economists like Sanford Ikeda, outlines the logical progression of government intervention.
Consider this illustrative example:
The US government imposes a tariff on Chinese steel
China retaliates with tariffs on US agricultural products
US farmers suffer losses, prompting government agricultural subsidies
These subsidies are funded by revenue from the initial tariffs
The subsidies artificially maintain resources in inefficient sectors
New problems emerge, triggering additional interventions
The chain reaction of interventions creates a self-perpetuating cycle of policy responses to problems caused by earlier policies.
The dynamics of interventionism are playing out in real-time with Trump’s latest trade policies. Let’s track how this cycle is already beginning to unfold.
Trump imposes substantial tariffs on Canada and Mexico — some of America’s most reliable trading partners — disrupting established supply chains and raising costs for businesses.
Financial markets tumble in response. Policy uncertainty indices soar. Business outlooks darken considerably as companies struggle to adapt to the new trade landscape.
Seeing these negative effects, the administration announces a targeted pause on tariffs specifically for the auto industry. This selective enforcement creates winners and losers, distorting market incentives and introducing opportunities for regulatory arbitrage. Inevitably, once the government selectively lifts tariffs for one industry, others will seek similar exemptions. This invites rent-seeking behavior such as lobbying and currying of political favoritism, creating additional market distortions and reinforcing the cycle of intervention.
The administration seems to believe that this pause will give automakers time to shift production to US soil. Trump’s argument boils down to: once cars are produced domestically, no need for tariffs!
This logic fundamentally misunderstands why production occurs where it does. If domestic production were truly the most efficient option, companies would already be manufacturing here, without government pressure. While domestic production avoids tariffs, it won’t necessarily result in lower prices for consumers, due to higher labor and material costs.
When these higher prices inevitably materialize, what happens next? Following the dynamics of interventionism, we can predict a third wave of interventions: perhaps subsidies for US automakers or tax credits for consumers who “buy American.” These policies will artificially shift demand toward domestic producers, creating substantial economic deadweight loss and trapping labor and capital resources in sectors where they’re less productive than they could be elsewhere.
Each step in this sequence illustrates Mises’s insight: government interventions create unintended consequences that prompt further interventions, setting off a chain reaction that moves us progressively further from efficient market outcomes.
Trade policy under the current administration will undoubtedly be chaotic. But the dynamics of interventionism tell us something even more concerning: the ripple effects of new tariffs won’t be confined to trade policy alone. As the administration scrambles to address the negative consequences of its trade war, we should expect additional interventions implemented in ad hoc fashion across various economic sectors. These responses will likely compound existing problems while creating entirely new ones, setting the stage for yet more intervention.
The lesson is clear. When evaluating the impact of Trump’s trade policies, we must look beyond the immediate effects of tariffs themselves. The dynamics of interventionism tell us that today’s trade war will not be contained to tariffs — it will spill into other areas of economic policy, fueling distortions that policymakers will scramble to fix with yet more interventions. The result? An ever-growing, unpredictable web of government action that moves us ever further from free markets and economic efficiency.
An initial step that has been bandied about of late has been engineering a dollar retrenchment. Even with a weaker dollar, profound challenges will be found in the rebuilding of physical infrastructure, widening vocational training, and revitalizing transportation systems. But an even more fundamental challenge lies in international disparities and expectations where compensation is concerned. Collective bargaining and higher wages have long been hallmarks of American industry, raising living standards but also making US manufacturing uncompetitive against nations with cheaper labor forces. Countries like China, India, Brazil, and Mexico can produce goods at a fraction of the US cost, owing to lower wages, and frequently with far fewer regulatory obstacles.
For decades, political candidates and labor activists alike have vacuously dangled the idea of bringing large-scale manufacturing back to the United States. Over the last ten to fifteen years, as the economic fortunes of formerly industrial regions have declined — exacerbated by globalization, automation, and a devastating opioid crisis — those promises have only grown louder.
Bringing manufacturing back to the US is a complex challenge that requires a realistic assessment of economic, logistical, and structural factors. While political rhetoric often frames reshoring as a straightforward solution to job losses and trade imbalances, the reality is more nuanced. It’s one thing to incentivize existing manufacturing firms to relocate to the US; it’s another to rebuild entire supply chains and industrial ecosystems that have lain fallow. Simply imposing tariffs or offering subsidies won’t undo decades of economic shifts overnight. Instead, a sober approach requires acknowledging the trade-offs, understanding which industries can feasibly return, and recognizing that reshoring may not necessarily lead to the same kind of job growth that manufacturing once provided.
The Labor Cost Problem
This creates a difficult, perhaps insurmountable, trade-off. If American workers demand wages consistent with the prior industrial era, domestic manufacturing will remain a stagnant relic. If wages are lowered to match global levels, domestic workers may find their parents’ or grandparents’ standards of living unattainable. Automation may provide a solution, as robots and AI-driven production could potentially make American factories far less labor-intensive and more efficient — but this would also accelerate the decline of US manufacturing jobs.
Global Supply Chains and Geopolitical Risks
Another overlooked factor is the complexity of modern supply chains. Many products today — especially in electronics, pharmaceuticals, and automotive manufacturing — require numerous inputs across various stages of production in multiple countries. Even if new American factories sprang up nationwide, production would still depend on components from abroad. A weaker dollar — needed to make US goods more globally competitive — would make imported inputs more expensive, potentially offsetting the cost advantages of domestic production.
Global trade dynamics are constantly shifting. Geopolitical tensions with China, reshoring efforts in Europe, and supply chain disruptions (such as the COVID-19 pandemic) have revived interest in self-sufficient domestic manufacturing. However, becoming a fully self-reliant industrial power is a monumental challenge — one that would take decades, not years, to accomplish — and to doubtable benefits. Long-term plans are vulnerable to major disruptions, including technological advancements, changing manufacturing methods, and emerging financial and economic blocs, all of which could reshape the landscape significantly.
Tesla, Inc. global supply chain exposure (March 2025) (Source: Bloomberg Finance, LP)
Market approaches
If bringing back large-scale manufacturing is unlikely in the short to medium term, what might be done over a long time period? A free-market approach consistent with American foundational values would focus on minimizing government intervention while allowing the private sector to allocate resources efficiently. Summarized in one sentence, the prospects for building and running massive industrial enterprises in the United States must be made more
Here are four realistic approaches:
Eliminate Barriers to Innovation and Entrepreneurship
Rather than artificially manipulating the economy to recreate a nostalgic industrial past, the US should focus on reducing regulatory burdens and lowering corporate tax rates to encourage investment in advanced manufacturing and high-tech industries. A dynamic, open market allows companies to allocate capital where it is most productive.
Expand Global Free Trade and Strengthen Regional Supply Chains
Protectionism and reshoring mandates are counterproductive in an interconnected, digital economy. Instead of assuming that all manufacturing should return, the US should eliminate restrictive trade agreements that limit specialization in high-value industries. Leveraging existing advantages — such as proximity to Canada and Mexico — can improve economic outcomes without causing market distortions.
Deregulate and Expand Workforce Development
Many American workers remain trapped in low-productivity service jobs due to an outdated education system and excessive occupational licensing requirements. By cutting red tape and investing in market-driven workforce training programs, the US can build a more competitive labor force without relying on costly, government-driven industrial policies.
4. Manage Expectations
A new generation of workers must recognize that, in many cases, the wages they have earned in recent decades have been anomalously high by historical and global standards. As economic conditions shift, the structure and role of collective bargaining in the American workplace must be reevaluated — aligning more closely with the economic realities of business rather than being treated as an entitlement. Moving forward, labor negotiations must be tied to the needs of businesses to manage costs, investments, and long-term viability, rather than ideological narratives about the alleged superiority of American labor.
In response to these challenges, there has been a growing interest in industrial policy — government efforts to actively shape and support key domestic industries through subsidies, tariffs, regulations, and strategic investments. However, these policies are closer to a pipe dream than actionable solutions. At its core, industrial policy is central planning, which inevitably leads to inefficiencies, misallocated resources, and corruption. Politically connected firms, rather than the most innovative or productive ones, tend to benefit the most.
Protectionist measures such as tariffs and subsidies often provoke retaliatory trade policies, ultimately harming exporters and consumers. Historically, industrial policy encourages complacency, leading industries to lobby for continuous government support even as they become obsolete. A more detailed economic analysis is needed to fully understand the long-term consequences of such interventions.
Pragmatism First
The era when most of the world’s industrial powers were crippled by world wars, leaving American manufacturing to thrive in a competitive vacuum, is long over. Inducing the relocation of a factory from, say, Vietnam to Ohio based on the simplistic notion that American workers are inherently “better” than their foreign counterparts is not only misguided but a hollow, pandering argument that fits better in a child’s worldview than serious economic discourse. The conditions for operating a large industrial enterprise in the United States must be at least as accommodating and advantageous as those found elsewhere — ideally, even more so.
The longer it takes labor unions, manufacturing associations, workers, and investors to adjust to this reality, the harder it will be to compete.
Political leaders benefit from oversimplifying the realities of reshoring manufacturing, ignoring the economic, logistical, and geopolitical hurdles. While industrial policy and protectionist measures promise revitalization, they are more likely to create distortions and inefficiencies than meaningful growth. Automation and technological innovation may offer a path forward, but they will not restore traditional manufacturing jobs. If the goal is to strengthen the economy, the US must prioritize reducing barriers to innovation, expanding trade partnerships, and reforming workforce development. Instead of empty promises about reviving a bygone era, the focus must be on radically reshaping how human capital is developed and deployed in a rapidly evolving global economy.
The professional forecasters were right: inflation remained elevated in February. The Personal Consumption Expenditures Price Index (PCEPI), which is the Federal Reserve’s preferred measure of inflation, grew at an annualized rate of 4.0 percent in February 2025, down from 4.1 percent in the prior month. PCEPI inflation has averaged 3.1 percent over the last six months and 2.5 percent over the last twelve months.
Core inflation, which excludes volatile food and energy prices, grew faster still. Core PCEPI grew at an annualized rate of 4.5 percent in January 2025, up from 3.6 percent in the prior month. Core PCEPI inflation has averaged 3.1 percent over the last six months and 2.8 percent over the past 12 months.
The question facing Fed officials is whether this is a temporary blip on the path back to 2.0 percent; or, whether inflation has settled in half a percent above target. The answer depends in large part on the stance of monetary policy.
The Federal Open Market Committee voted to hold its federal funds rate target at 4.25 to 4.5 percent. Recall that the nominal federal funds rate target is equal to the real federal funds rate target plus expected inflation. Markets are currently pricing in around 2.4 percent PCEPI inflation per year over the next five years. Hence, the real federal funds rate target range is around 1.85 to 2.1 percent.
To gauge the stance of monetary policy, we must compare the real federal funds rate with estimates of the natural rate of interest. The New York Fed offers two estimates of the natural rate: the Holston-Laubach-Williams estimate was 0.80 percent in 2024:Q4; the Laubach-Williams estimate was 1.31 percent. Both are well below the federal funds rate target range, suggesting monetary policy is tight.
The Richmond Fed offers an alternative estimate of the natural rate. Its Lubik-Matthes estimate puts the natural rate at 1.89 percent in 2024:Q4. That’s close to the lower limit of the federal funds rate target range, implying that monetary policy is neutral to tight.
Together, the estimates suggest that monetary policy remains tight, though the extent to which it is tight depends crucially on the estimate used. From each, we can expect inflation will continue to decline.
There is another reason to think inflation will fall in the months ahead. Problems with seasonal adjustments have meant that inflation readings have been higher over the first four months of the year than in the final eight months of the year. In the first four months of 2023, inflation averaged 4.0 percent. Over the final eight months of 2023, it averaged just 2.0 percent. Similarly, in 2024, inflation averaged 4.1 percent over the first four months and 1.9 percent over the final eight months.
Inflation has averaged 4.1 percent over the first two months of 2025. Based on recent trends, inflation will be lower, on average, over the remainder of the year.
At the March FOMC meeting, the median member penciled in just two 25-basis-points worth of rate cuts this year. Of course, actual monetary policy will depend on how inflation and employment data evolve over the year. Futures markets are currently pricing in three cuts this year. Since FOMC members will only deliver more cuts than they have projected if inflation is lower, or real economic activity is weaker, than they currently expect it to be, the third rate cut implied by the futures market suggests those in the market believe monetary policy is tighter at present than FOMC members think. If market participants are correct, inflation will fall faster than FOMC members have projected.
On Friday, the Bureau of Economic Analysis released preliminary figures for GDP and personal income by state for last year. I prefer using personal income over GDP for comparing state economic performance because GDP includes corporate profits that are not distributed to individuals, but are partly based on where the corporations’ headquarters are located. So Delaware ranks very high in GDP, less so on personal income. But let’s dig into both figures.
Every state but North Dakota and Iowa had real, inflation-adjusted GDP growth in 2024. Growth was strongest across the South and weakest in the Great Plains. Note that these figures adjust for US-level inflation, but not state-specific inflation rates, so they will overstate growth for states that had faster-than-average inflation and understate growth for states that had slower-than-average inflation. With those caveats, the fastest-growing state was Utah (4.5 percent), and the slowest-growing state was North Dakota (-0.7 percent).
Personal income growth, not adjusted for inflation, looked like this in 2024. Every state saw nominal personal income growth, but the entire Mississippi River area had poor income growth, while the Pacific and South Atlantic regions did very well. The fastest-growing state was North Carolina (6.9 percent), and the slowest-growing state was North Dakota (0.1 percent).
A few states, like Arkansas and Oregon, had markedly different personal income growth and GDP growth last year. One reason for this is the changing international terms of trade. When oil prices fall, for example, that hits oil-producing states’ GDP hard right away, but it may take a little longer for the hit to personal income to arrive (drillers and refiners might not lay off staff or cut pay right away). Soft oil prices were undoubtedly a major reason for North Dakota’s economic woes in 2024.
In the short run, these sorts of industry-specific shocks play a big role in explaining why some states grow faster than others. But over time, state-level policies play a big role, too. In particular, state policies that deter population growth have a big impact on economic growth. Here are the estimated population growth figures for 2024.
The results are not too surprising. For the most part, the states with rapid population growth in 2024 (Arizona, Nevada, Utah, Idaho, Texas, Florida, the Carolinas) have had rapid growth throughout this century. Delaware is a more recent fast grower, and New Jersey is the real surprise, with a growth rate of 1.3 percent bucking its usual downward trend.
At the state level, historical fertility patterns and migration are the primary drivers of population growth — and, by extension, income growth. State governments can’t do much to encourage people to have more children, and even if they did, the effects on the labor market would come decades later; but they can affect migration. States that make it hard to build and have high taxes and regulations tend to lose people to states that have abundant housing and lower taxes and regulations. In that light, it’s not surprising that Washington (which does not have a personal or corporate income tax) is the fastest-growing state on the Pacific Coast. Or that Indiana, which has a 3 percent flat tax and a friendly regulatory climate, grows faster than its neighbors to the east, west, and north, and Louisiana and Mississippi, lowest on economic freedom in the South, lag behind the rest of the South in population growth.
In December, we’ll finally get updated estimates using state-specific inflation rates, which will provide a clearer picture of which states truly performed best last year.
(Source: Bloomberg Finance, LP)
