If you’ve visited Disneyland in recent years, you’ve likely encountered Rise of the Resistance. It’s an audacious ride, part of a push to redefine what theme park attractions can be. Massive doors slide open to reveal a cavernous hangar where Star Destroyers loom in the distance, their engines humming as they glide past. Dozens of Stormtroopers stand in rigid formation, flanked by droids and Imperial officers barking orders. The scale is jaw-dropping. And here’s the kicker: this isn’t even the ride — it’s the queue.

When I last visited Disneyland in February 2020, I went in somewhat prepared. I’d planned the trip, watched previews, and knew what to expect. But recently, a friend described his own experience with the ride — one he stepped into completely blind. Imagine lining up with zero context, no clue what awaited beyond those doors. My experience was incredible; his was mind-blowing. As he recounted it, I could hear the childlike awe in his voice — a visceral, unscripted wonder I’d partially traded away during my research.

What made his moment so powerful? A trusted curator. For him, this role was filled by close friends who orchestrated the trip — people who know him, his wife, and his daughter intimately. They understood Disneyland’s magic and tailored the adventure to their group, leaving him free to be swept along, discovering each surprise as it unfolded. That Rise of the Resistance moment wasn’t just a ride — it was a memory forged by his trust in those friends.

This story hints at a bigger shift in what we value and how we experience the world. Trusted curators are more vital than most realize, especially as our economy races toward richer, more meaningful offerings. What’s driving this change?

The Economic Value Ladder

Economists B. Joseph Pine II and James H. Gilmore described a hierarchy of economic value. At its base lie commodities — raw materials like timber or coffee beans. Next come goods, crafted from those resources into tangible products like furniture or roasted coffee. Above that, services deliver convenience or expertise, such as in-home assembly or barista-prepared lattes. Higher still, experiences stage memorable moments, like a themed café or a concert. And at the pinnacle — for now — sit transformations, guiding people toward personal growth or purpose, such as a life-changing retreat or therapy session. Each step up this ladder offers greater value, commands higher prices, and captures deeper human interest.

The economy operates across all these levels simultaneously, but its momentum pulls upward. The challenge? The higher you climb, the harder it gets. Producing a commodity or good is (relatively) straightforward; staging an experience or guiding a transformation requires nuance and insight —yet we manage it. People find transformation in fitness programs, therapy, or travel, and meaning through religion, brand affiliations, or social platforms like Facebook. These aren’t accidents — they’re the result of systems designed with care. Their creators refine them through time, contemplation, and experimentation.

Modern efficiencies have accelerated this climb. Automation and technology have freed us from repetitive tasks, giving us time to dream, create, and ascend the economic ladder. Nowhere is this more evident than in today’s booming experience economy.

The Rise of Experience

For 15 years, my insurance agency — one of the few in the US specializing in immersive and experiential event production — has witnessed this explosion firsthand. It’s staggering. From grand spectacles like The Wizarding World of Harry Potter at Universal Studios or Star Wars: Galaxy’s Edge at Disneyland to smaller gems like speakeasies and escape rooms, experiential design is infiltrating everything. It’s not just explicit immersive events, either — it’s woven into everyday life. Think of axe-throwing nights at your local brewery, a grocery store where chefs demo recipes as you shop, or virtual reality concerts that transport you to another world. The experience economy is expanding rapidly, blending physical and digital realms to captivate and inspire.

Even public spaces are catching on. Consider Tumamoc Hill in Tucson. Once simply a winding road to some antennas, now intentionally offered to the public as a meditative ascent with sweeping views to stir reflection. Or Sweetwater Wetlands, a former sewage plant reborn as a lush oasis for birdwatchers and nature lovers. These aren’t just upgrades — they’re experiential reinventions. Curation transforms the mundane into the meaningful.

The economic ascension is enjoyable and valuable to us.  A cold beer in a generic bar setting might be satisfying. A mead poured into your personal flagon at Short Rest Tavern, hidden behind Tucson Games & Gadgets, is so much better — for me, at least. As we ascend the value ladder, differentiation and customization become critical, and can command higher prices. Higher-value offerings require intimate knowledge of the individual — sometimes deeply personal insight — paired with systems efficient enough to deliver that specificity sustainably.

AI and the Future of Efficiency

Computers and software have accelerated  this necessary efficiency in recent decades, but artificial intelligence is set to supercharge our climb up the economic ladder. Tools like large language models, computer vision, and image generation — alongside general-purpose AI and robotics — are turning yesterday’s grunt work into commodities, freeing up time and resources for higher-value pursuits. It’s already happening: mundane tasks from data entry to assembly lines are shrinking, while creative and experiential industries grow. Pundits and academics may warn of job losses and disruption, but history suggests we needn’t worry: each wave of efficiency, from the steam engine to the internet, has shifted labor up, not out. There’s no evidence AI will break this pattern; it’s more likely to amplify our capacity to craft experiences and beyond.

Skeptics might wonder, “Can’t AI just create those experiences for us, sidelining humans altogether?” It’s a reasonable concern — AI can churn out simulations or itineraries with ease — but it overlooks what gives experiences their depth. Consider a friend who planned a hike for me through Picture Rocks in Saguaro National Park. The trail, framed by cacti and capped with a sunset she knew I’d cherish, left a lasting mark — not because of the scenery alone, but because she was there, shaping it with me. AI can deliver polished recommendations, machines excel at optimization; they don’t provide laughter on the trail with a friend who truly gets you. Offering yourself to another’s care and receiving something crafted in return is deeply human — a quality AI can’t fully capture. As efficiency accelerates, curators will harness these tools, ensuring technology enhances connection, not just calculation.

The Curator’s Role

We stand at an inflection point where trusted curators are becoming the linchpins of our economic ascent, shaping the experiences that define our lives. They’re more than planners or guides — they’re the ones who craft moments that matter. In a world racing toward efficiency, curators remind us that the highest value lies not in the machine, but in the human connection it enables.

Effective curators possess a unique blend of skills: empathy to anticipate needs, creativity to craft novel experiences, and deep knowledge to ensure authenticity. Beyond staging experiences, they guide us toward meaning and transformation. They don’t just hand us a map, they walk with us, pointing out hidden paths where we might find purpose or clarity. Think of a mentor who nudges you toward a breakthrough, or a friend who plans a trip that shifts your perspective — like my friend’s unscripted awe at Disneyland. By knowing us, curators tailor moments that spark reflection or growth, helping us uncover what matters most and evolve into the person we’re meant to be.

What lies beyond transformation? We don’t have words for that yet, but the curator’s role will only grow as we chase that horizon. In a world where technology handles the mundane, it’s the human touch that sets experiences apart. People don’t just value the rides, the views, or the things; they treasure the creators and what they craft — the chance to connect with people who shape their journeys, to shift something within themselves, to find clarity or purpose. That’s the curator’s gift. Whether it’s a friend guiding you through Disneyland for the love of it or a paid planner reimagining a waste treatment facility, the human element remains irreplaceable. So long as we keep imagining ways to serve — through friendship or commerce — to help others find purpose and ignite real change, curators will not just weather the winds of the new economy — they’ll soar on them.

There’s a famous experiment involving jams. Not problems, and not what old people call music, but the third thing: sweetened and thickened fruit spreads.

The experiment famously showed that at some point having additional choices is overwhelming, and actually appears to make people worse off. There were actually three studies, though for some reason the “jam experiment” is the most famous.

Study 1: Jam Selection Experiment

The experiment was conducted in a gourmet food store with tasting booths offering either 6 or 24 varieties of jam. Approximately 60 percent of shoppers stopped to peruse the extensive-choice display, while 40 percent approached the limited-choice display. Surprisingly, however, 30 percent of those who sampled from the limited selection made a purchase (a code on the back of the coupon told researchers which display each eventual buyer had seen), compared to only three percent from the more extensive selection.​ More choices generated more interest, but significantly less action. 

Study 2: Essay Topic Selection Experiment

College students were offered (PDF) either six or 30 topics for an optional essay assignment.​ Students given six topics were more likely to complete the assignment and produced higher-quality essays than did those given 30 topics.​ Choice can be demotivating.

Study 3: Chocolate Selection Experiment

Participants were asked to choose a chocolate from either a selection of six or 30 options.​ Those with six options reported greater satisfaction with their choice and were more likely to select chocolate over monetary compensation than those with 30 options.​

Together, these three studies suggest a model of how we decide. While a larger array of choices may initially attract interest, too many choices can ultimately reduce motivation to make a decision and decrease satisfaction with the chosen option.

This has been widely interpreted to be a criticism of capitalism, but it isn’t. In a commercial society, there are two factors that the experiments ignore.

Brand names: People may shop around at first, but they also use brand names and reviews to settle on a choice. In an actual grocery store, with brand names of recognizable products, people don’t spend hours in the cereal aisle. They go, look for a second at their favorite cereals, and then make a choice. Easy peasy. But then why are there so many choices? That leads to point two. 

Profit as a selection device: For a cereal to survive, and compete for shelf space, some minimum number of people must buy the cereal, enabling the producer to cover all costs and make a return equal to or greater than their opportunity cost of capital. 

Taken together, these two things mean all those cereals have a significant number of people who are looking for that cereal, and no other, and who buy that cereal. Further, the number of buyers must be sufficient to cover the social “investment” in that brand and flavor. So while the cereal aisle, or jam rack, may appear wasteful or excessive to an academic with little idea how commerce works (perhaps because they’ve never had a real job), it is in fact a carefully curated and efficient mechanism for providing choices people actually want. (Further, the experiment itself has some pretty serious problems…)

BUT: Social Media?

The argument above, while correct (IMHO), requires quite a bit of machinery to operate in the background. The commercial system, once mature, maintains a profit-and-loss test, and nurtures the use of brand name and reputation to simplify and curate choice. What looks like chaos is in fact well-ordered: jars of jam are expensive to manufacture and ship, and the shelf space has an opportunity cost, so that only jam people want is provided (at least over time).

None of those conditions exist, at least not yet, in the wild world of social media. The costs of manufacture and distribution are negligible, and the opportunity cost of “shelf space” on the internet is just the competition for attention, because platforms are nearly free.

Kevin Munger (yes, my son) recently wrote a piece exploring this problem. His article “Unbundling and Abundance” addresses the impact of technological advancements on the production and consumption of cultural products. Kevin argues that these are the main issues:​

·         Technological Advancements: The rise of the internet and digital tools has lowered barriers to entry for creators, leading to an explosion of content across various media forms.​

·         Unbundling: Traditional media packages, such as albums or cable TV bundles, are being broken down. Consumers now have the freedom to select individual pieces of content, tailoring their media consumption to personal preferences.​

·         Abundance of Content: This unbundling has resulted in an overwhelming abundance of content, making it challenging for consumers to discover high-quality material amidst the vast options available.​

·         Absence of Gatekeeping: The role of traditional gatekeepers, like editors and producers, has diminished. In their place, algorithms and social media trends have become the new curators — determining what is important — and verifiers — determining what is true. The consequence is that the most prominent content is disconnected from profit-and-loss calculus, as well as quality ‘buyer’ feedback.

These trends in media production and consumption have significant economic implications. While more creators can share their work, monetizing content has become complicated. On one hand, anyone can now publish content and charge whatever audiences will pay through services like substack and Patreon. On the other hand, the enormous flood of new content raises the level of competition to earn a sustainable income. 

The shift towards unbundled content consumption can lead to fragmented cultural experiences, as shared media experiences become less common.​ In particular, as legacy print and television outlets have lost their stranglehold over reader attention and ad dollars have moved to more precisely targeted platforms on social media, the traditional mainstream media have lost their authority.  

I have often been quite critical of people who naively claim markets create “excessive choice,” because brand names, selection by profit and loss, and differences in taste are factors that such critiques usually miss. But social media may, in fact, be an example where the “jam problem” is real. We have so many choices that it’s impossible to select for quality or feel satisfaction with one’s choice.

Eventually, as Kevin points out, there may emerge new models of curation, verification, and monetization to navigate this landscape, but for now abundance and unbundling are getting worse, not better.

David Hume’s A Treatise of Human Nature has been called “one of the keystone books of western philosophy,” “the founding document of cognitive science,” and perhaps the “most important philosophical work” in the English language.

In my previous essay, David Hume on How Not to Lose Your Mind, I considered how Hume’s ideas anticipated modern neuroscience.

For those who believe reason governs them, further consideration of Hume’s philosophy exposes their arrogance.

“Nothing is more usual in philosophy, and even in common life,” Hume wrote in his Treatise, than to claim the “pre-eminence of reason above passion.”  

By passions, Hume means our predispositions, charged thinking, and emotions generated by beliefs of which we are often unaware. Hume argues, “reason alone can never produce any action, or give rise to volition.” He adds, “I infer, that the same faculty [reason] is as incapable of preventing volition, or of disputing the preference with any passion or emotion.”

Hume argues our “passions” come first, and then we use “reason” to justify what our emotions have decided. We think reason drives our decision-making bus, but reason is often only a passenger. 

When you let the implications of this sink in, it should bring your mind to a full stop. Hume challenges the assumption that we can rely on reason to manage our emotions.  

Authoritarian politicians know that arousing intense emotions, such as fear and hatred, is far more effective at galvanizing the public than reasoned debate. President Biden, for example, while in office, did his best to censor different opinions about COVID vaccines while promising a “winter of… death” to the unvaccinated.  

Similarly, your friend, colleague, or family member, driven by their passions, may never respond to reason until you first stir their passion.

Hume’s memory of his “past errors” and his “numberless [mental] infirmities” made him “dread” the possibility of making still more errors. We, too, make one mistake after another, and reason doesn’t keep us from yielding to our errant passions. 

Hume makes what he calls an “extraordinary” claim: “Reason is, and ought only to be the slave of the passions, and can never pretend to any other office than to serve and obey them.” So, what could he or we do to separate ourselves from the dysfunctional dictates of our passions?  What refines or tempers our passions?

Hume allows that first we must “perceive the falshood of any supposition” that stirs our passions. 

In his later essay “The Sceptic”  in his volume Essays, Moral, Political, and Literary, Part 1, Hume outlines a robust solution of upgrading our conditioned programming. The goal is to achieve “a lively sense of honour and virtue, with moderate passions.” Then our “conduct will always be conformable to the rules of morality; or if [we] depart from them, [our] return will be easy and expeditious.” 

Yet, not all people pursue virtue. Hume writes of such people:

Where one is born of so perverse a frame of mind, of so callous and insensible a disposition, as to have no relish for virtue and humanity, no sympathy with his fellow-creatures, no desire of esteem and applause; such a one must be allowed entirely incurable, nor is there any remedy in philosophy. 

Hume’s portrait of the unvirtuous is grim: “He feels no remorse to controul his vicious inclinations: He has not even that sense or taste, which is requisite to make him desire a better character.”

Hume himself wondered what can be done to reform such a person: “Should I tell him of the inward satisfaction which results from laudable and humane actions, the delicate pleasure of disinterested love and friendship, the lasting enjoyments of a good name and an established character.” 

For those who don’t value virtue, Hume admitted, “my philosophy affords no remedy in such a case, nor could I do any thing but lament this person’s unhappy condition.” In short, no amount of pleading will convince them to cultivate virtue to temper their passions. Hume was under no illusions that good advice would quickly transform anyone.

To those of us who are, in Hume’s words, “tolerably virtuous,” Hume advised deepening the understanding of the conditions under which passions become more virtuous: “It is certain, that a serious attention to the sciences and liberal arts softens and humanizes the temper, and cherishes those fine emotions, in which true virtue and honour consists.” 

As Hume’s “tolerably virtuous” person studies, he develops “a greater sensibility of all the decencies and duties of life. He feels more fully a moral distinction in characters and manners.” 

Suppose I am agitated by the speed at which a supermarket clerk scans groceries. Although reason comes up with an excuse for my less-than-charitable thoughts, my non-virtuous passions drive my reaction. The more I study and reflect on the inherent humanity in all people, the less likely I am to notice such trivia. As Hume writes, as soon as I discover the “falshood of [my] supposition,” (in this case that the clerk is a mere object to me), my judgment of the clerk falls away. 

In Hume’s view, our studies will teach us that “the mind is not altogether stubborn and inflexible, but will admit of many alterations from its original make and structure.”

Hume advised the student of virtue to “propose to himself the model of a character” and become “well acquainted with those particulars, in which his own character deviates from this model.” 

Hume prescribed ongoing practice for those who want to avoid mistakes stirred by jealous passions: “Let him keep a constant watch over himself, and bend his mind, by a continual effort, from the vices, towards the virtues; and I doubt not but, in time, he will find, in his temper, an alteration for the better.”

In short, “exhortations” are not enough. Instead, by working toward better habits and personal “reform,” “good dispositions and inclinations” are possible:

A man, who continues in a course of sobriety and temperance, will hate riot and disorder: If he engage in business or study, indolence will seem a punishment to him: If he constrain himself to practise beneficence and affability, he will soon abhor all instances of pride and violence.

Reading Hume, it is hard not to despair about the future of humanity. Unbridled passion is the norm on college campuses, and the canons of moral philosophy in Western civilization have been eliminated from curriculums. 

In her book The Soul of Civility, Alexandra Hudson makes a stirring case for the classical education abandoned in today’s public schools and universities. She observes that “the liberal arts and the humanities were the modes of education that made a person free and fit for citizenship.” Such an education, Hudson writes, cultivated a “love of virtue and the polis, and by promoting the reason and self-governance… allowed people to move beyond being dominated by their own passions.” 

Hudson recommends “the study of philosophy and literature, which exposes us to beauty, goodness, and truth.” Such studies help us “appreciate our own humanity, and that of others.”  Such curriculums soften “the rougher edges of our human nature, teaching those who studied it ways to pursue peace and harmony with others, and to avoid cruelty, violence, and conflict.”

Will we follow the wise prescriptions of Hume and Hudson before it is too late? A people without virtue, driven by unbridled passions, will not remain free.

For decades, America’s manufacturing sector has seemingly eroded, with jobs and production shifting overseas in search of lower costs and fewer regulatory constraints. While many companies have relocated abroad, the reality is more nuanced than it appears. Certain industries have declined, but US manufacturing output has fluctuated rather than collapsed outright. By some measures, total output has remained stable or even grown. For instance, US manufacturing output in 2021 reached $2.5 trillion, an 11.55 percent increase from 2020. A more accurate depiction of manufacturing trends suggests that while employment in the sector has fallen, productivity gains and technological advancements have prevented an absolute decline in output.

Nevertheless, domestic manufacturing has been in relative decline for decades, making it a convenient political talking point. Recently, the concept of a “Mar-a-Lago Accord” has emerged — a theoretical framework aimed at restructuring the international financial system to benefit US interests.

Key proponents, including Treasury Secretary Scott Bessent and economic adviser Stephen Miran, suggest that such an accord could reduce US debt and revitalize domestic manufacturing by weakening the dollar, lowering borrowing costs, and attracting investment — all while maintaining dollar dominance. This plan would involve persuading foreign trade partners to cooperate, swapping US bonds for long-term, non-tradable debt, and potentially using US assets as collateral. However, securing such international cooperation could lead to unintended consequences, including rising domestic borrowing costs and higher consumer prices. But the lynchpin of all of that is purposeful, politically-motivated, dollar depreciation.

The US Dollar Index vs. the Trade-Weighted Dollar

To fully assess the dollar’s strength since the end of the Cold War, the most relevant metric is the trade-weighted US dollar (TWUSD), which considers exchange rates with a broader range of trading partners, including China and Mexico — two of the largest recipients of outsourced American manufacturing. In contrast, the more commonly cited US Dollar Index (DXY) primarily tracks the dollar against a limited basket of six currencies (euro, yen, British pound, Canadian dollar, Swedish krona, and Swiss franc) and fails to capture broader trade dynamics.

Trade-Weighted US Dollar (black) vs. the US Dollar Index (blue), 1990–present

Since the fall of the Soviet Union, the trade-weighted dollar index has risen over 110 percent, making US exports more expensive globally while making imports cheaper. As the financial sector has gained dominance, domestic industries competing with foreign firms have faced increasing pressure.

Proponents of a weaker dollar argue that devaluation would make US exports more attractive while raising import costs, thereby incentivizing domestic production and consumption. However, currency devaluation alone does not enhance the quality or competitiveness of goods; it simply manipulates prices. As a National Bureau of Economic Research study notes, currency undervaluation can influence comparative advantage, but its impact varies widely depending on broader economic conditions.

Devaluing the Dollar: Shortsighted and Ineffectual

Even if America were to beat the dollar down as a first step toward embracing an all-out industrial policy aimed at reviving manufacturing, the transition would take decades — likely generations. And over the course of those years the economic landscape is likely to shift unpredictably multiple times: new technologies, global shifts in shifts, and financial crises, each of which inexorably alters the global landscape. At the same time, the successful accomplishment of the reshoring of manufacturing to the US would require an improbable number of other things – access to cheap and reliable energy and efficient raw mineral sources, for example – to remain the same or improve.

If the US dollar is to be the focus of policy, a more broadly beneficial approach would be to prioritize long-term stability over persistent inflationary pressures, ensuring a sound monetary foundation for both investment and economic growth. The Federal Reserve’s inflationary bias has played a pivotal role in facilitating the shift away from toward financialization. If the Fed were restricted to a single mandate of maintaining a stable dollar with a zero percent inflation/deflation target, it could reduce the outsized emphasis on financial markets. Curbing excessive liquidity-driven asset inflation and making financial markets less dependent on Fed intervention would tacitly encourage capital to flow into productive, long-term investments rather than speculative financial assets.

Politicians should attempt to be honest about the realities of reshoring. As difficult as it may be to accept, Americans may need to adapt to and navigate the realities of today’s economic landscape rather than attempting to recreate the unique, long-gone conditions of the 1960s. While browbeating the dollar might provide a temporary boost to exports, it is no silver bullet. Instead of looking for quick fixes and promising overnight rejuvenation of a bygone era, a more productive focus seeks market-based solutions that enhance innovation, investment, and global trade.

The Structural Challenges of a Weaker Dollar Strategy

For decades, America’s primary exports have been the dollar itself–actual dollars, US Treasury bonds, and dollar-denominated financial assets–rather than physical goods. China, Japan, Germany. Mexico, Canada, and other major trading partners have accepted dollars in exchange for their exports, fueling America’s consumption-driven economy. Those dollars have been invested in US Treasuries, enabling the massive pile of debt that now threatens America’s economic heath and national security. Undoing that long-established arrangement would require much more than just a weak dollar — it would necessitate a complete reorganization of the US economy away from financialization.

Even if the process of shifting resources away from financial products into brick and mortar goes smoothly, industrial power won’t return within one or two presidential terms; certainly not overnight. America has spent decades deindustrializing, and much of the required physical infrastructure, supply chain establishment, and cultivation of a skilled labor force essential for large-scale production will have to start anew. Reviving these components requires far more than currency manipulation.

The Panama Canal was opened in 1914. It was an enormous undertaking. The canal took ten years to complete (from the time Teddy Roosevelt got our country’s work on the canal started), and $400 million (about $15 billion in today’s money).

For ships, the Panama Canal saved a trip around South America at Cape Horn; albeit at the cost of the toll charged by the canal. In its first year of operation, less than a thousand ships passed through the canal. By the 1960s, the number of ships passing through the canal had risen to about 14,000 per year. From the 1960s to 2023, the number of ships passing through the canal fluctuated about that number (14,000), while ship size increased enormously. In 2024, due to a water shortage, the number of ships passing through the canal fell to about 12,000.

Last year, not only did the number of ships passing through the canal fall, waiting times for ships “in the queue” (or, lined up outside the canal) increased. It should also be mentioned that tolls per ton have very much increased since the canal was turned over to Panama, and “transit fees” have been added.

Because of higher costs, waiting times and other problems, shipping companies are exploring alternatives such as routing ships around Cape Horn and transferring cargo to rail and pipeline to cross the Americas through Mexico. And, most recently, the management of the Panama Canal has become a political issue in the United States. The Trump administration expressed concern with the incorporation of the canal into China’s Belt & Road Initiative. Fortunately, Secretary of State Marco Rubio and Panamanian President José Raúl Mulino have resolved this matter, with Panama’s commitment to remove the canal from that initiative.

This series looks at the history and current issues concerning the Panama Canal. We begin with the technology of the lock canal.

The Technology of the Lock Canal

The Erie Canal overcomes the change in elevation from Buffalo at Lake Erie (590 feet above sea level) to Albany at the Hudson River (2 feet above sea level). Ignoring some intermediate changes in elevation, the canal descends 588 feet along its length.

Locks are used to convert the descent of a canal into so many discrete steps. At each step, there is a lock. The operation of the lock lowers ships from a higher level of one portion of the canal to the lower level of the next portion. Or, conversely, raises ships. In the case of lowering a ship:

A) The ship comes into the lock at the higher level. At this time, the doors of the lock to the higher level are open, and the doors of the lock to the lower level are closed.

B) Once the ship is in the lock, both sets of doors are closed, and water is discharged from the lock to the lower level. In this process, the level within the lock is lowered to that of the lower level.

C) When the level in the lock reaches the lower level of the canal, the doors of the lock at the lower level are opened, and the ship proceeds out of the lock.

It was Leonardo da Vinci who invented the lock canal. In particular, the “V” or mitre shape of the juncture of each of the two sets of doors of the lock allows the water pressure of uneven water levels to shut the doors tight. Conversely, the lack of pressure of equal water levels allows easy opening of the doors.

Da Vinci consulted with the French in their projection of a great canal (270 miles) from Bordeaux on the Atlantic Ocean to the Mediterranean Sea. The southern part (connecting with the Mediterranean) was completed in 1691, and the northern part (connecting with the Atlantic) was completed in 1838.

The Erie Canal was a bit longer (350 miles). It was particularly impressive as we were a developing country at the time of the construction of the Erie Canal (from 1817 to 1825).

A canal across the Isthmus of Panama, although much shorter than either the French Canal of the Two Seas or the Erie Canal, would be even more impressive.

Crossing the Isthmus

By 1849, the United States had secured California and Oregon (then including Washington state) on the Pacific Coast. Freight service between the east and west coasts of the country was conducted by ship around South America.

That year, the S.S. America, a steam-powered side-wheeler, departed the east coast and – while the ship was making its way around South America – word got back to the east coast that gold had been discovered in California. Hundreds of people hurriedly made their way to Panama, to cross the isthmus by old Indian trails, to intercept the side-wheeler at Panama City. When the ship arrived at San Francisco, everybody on board except the captain joined in the Gold Rush, crew as well as passengers. The ship was stranded in San Francisco for months before provisions and a new crew could be found.

There had to be a better way.

In 1855 a better way came to fruition: a railroad at the Isthmus of Panama. The Gold Rush gave new impetus to a project to construct a railroad there. Even when it was under construction, 49ers paid to go as far as the railroad would take them, and completed their journey on foot. With the Gold Rush, additional shares of stock were sold to investors back in New York. Other funds were raised in London by an issue of bonds. In the end, completing the railroad required $8 million, and took the lives of some 5,000 workers, most due to malaria. With the completion of the railroad, travel from New York to California took something like 30 days, instead of 180.

The period from its completion until 1869 was a golden age for the Panama Railroad. During this time, the Panama Railroad effectively had a monopoly on “interoceanic” traffic. Although the railroad’s capital expenditure per mile of road and operating expenses were very high, its revenues were even higher. The interest obligations of its bonds were easily met, and dividends on its stock were regularly paid. Then, in 1869, came the first transcontinental railroad. The Panama Railroad lost its monopoly.

As the following chart shows, the price of stock in the Panama Railroad peaked at about 3.5 times par value just prior to the completion of the first transcontinental railroad. Price subsequently fell to about half of par value, and then recovered to a modest premium over par value. While the company had lost its monopoly, it continued to be profitable.

Starting in 1879, price started to rise on indications that the French were interested in acquiring the Panama Railroad pursuant to constructing a canal. In 1881, the Panama Railroad was sold to a company headed by Ferdinand de Lesseps for $250 per share. De Lesseps had headed up the French company that constructed the Suez Canal.

In 1881, the Panama Railroad was purchased by a French company headed by Ferdinand de Lesseps. The French company was mostly interested in the Panama Railroad because of its grant from Colombia to a right of way across the Isthmus of Panama.

Previously, from 1859 to 1869, de Lesseps had headed the French company that constructed the Suez Canal, a 78-mile sea-level canal connecting the Mediterranean Sea and the Red Sea (which, in turn, connects with the Indian Ocean). The new canal (the Panama Canal) would be much shorter and presumably less expensive. The estimated cost was, however, grossly underestimated.

Work got underway immediately. Tens of thousands of workers were assembled, along with lots of heavy equipment and scores of well-trained French engineers. The work, however, was impeded by jungles and very rugged mountainous terrain, by tropical diseases, and by raging rivers. Landslides were a constant problem. It became obvious that a sea-level canal was impractical and that the canal would have to be a lock-canal. By 1889, $287 million had been spent, 22,000 workers had died, and the canal was only two-fifths completed. Work was then suspended, and the company ended in bankruptcy and scandal.

At the time, the United States was interested in an alternate canal route, through Nicaragua. But, with the French project in shambles, the United States would reconsider its options if the French project could be purchased on reasonable terms and if an agreement could be obtained from Colombia.

Buying the French project was not a problem. $40 million was all it took to buy their mess. But, getting an agreement from Colombia proved to be impossible. The canal turned into a matter of national pride, and a proposed treaty with that country was rejected. So, the United States took a different approach.

At the time of independence, the enormous holdings of Spain in the New World were organized as three great viceroys, each the size of an empire: Colombia, Mexico and Peru. All three broke up during the century following independence. Breaking away from Colombia by the mid-nineteenth century were Venezuela and Ecuador, leaving only Panama still part of Colombia.

When Panama sought independence from Colombia during the time the United States became interested in completing the canal started by the French, the United States backed Panama. The United States paid the new country of Panama $10 million plus $250,000 per year for a perpetual lease. The United States also paid Colombia $25 million to accept Panama’s independence.

Money can be useful in getting things done.

Writing eight years ago in USA Today, I cheered: “President Trump’s proposed budget takes a big step towards draining the swamp in Washington. This is the first time since the Reagan era that a president has sought a wholesale demolition of boondoggles.”  The Washington Post fretted that under Trump’s first budget, “government would be smaller and less involved in regulating life in America.”

Well, that didn’t happen. 

In his first term, Trump was initially thwarted and then mostly routed by the permanent Washington regime.  His victory last November provides an epic rematch with the administrative state [or Deep State – whatever term AIER prefers] even better than the final Ali-Frazier Thrilla in Manila. [[if the 1975 boxing reference is archaic or would mystify too many readers, zap it]]

In his second term, Trump and Elon Musk and his Department of Government Efficiency (DOGE) team are vigorously purging federal deadwood.  Washington is howling and some federal judges seem determined to rescue every shiftless civil servant in the land. 

DOGE is savvily exposing the villainies and follies of agencies targeted for elimination or radical downsizing.   Thanks to DOGE, the credibility of the US Agency for International Development collapsed faster than the East German regime after the fall of the Berlin Wall.  Musk is already talking about setting loose the DOGE hounds to discover what happened to the hundreds of billions of dollars of US aid to Ukraine. If that occurs, the results could be far more embarrassing for President Zelenskyy than his recent Oval Office meltdown.

Can Trump and Musk achieve victory over entrenched bureaucracies beloved by the media and much of Congress? Will DOGE triumph where plenty of prior presidents blundered and backtracked?   

Late in the nineteenth century, “President Grover Cleveland determined to weed out the incompetent… from the federal service. An order was given to dismiss these useless employees, and when it became known… Senators and Representatives thronged the White House and insisted upon a revocation of the order,” as James Beck related in his 1933 classic, Our Wonderland of Bureaucracy. President Cleveland caved—the first triumph of the newly-formed federal civil service over the White House. 

Sheer political deceit explains much of the apparent failure to curb government power. As a presidential candidate in 1932, Franklin Roosevelt condemned deficit spending and then opened the federal spending floodgates wider than ever after he arrived in the White House.  FDR also promised not to confiscate gold owned by American citizens but he betrayed that pledge as part of his pursuit of inflation as a panacea.  FDR steamrolled the Supreme Court, resulting in endless rulings practically presuming that any economic regulation or decree had a “rational basis” as long as legislators did not explicitly proclaim they were nullifying constitutional rights.

In 1968, the Republican Party Platform howled: “An entrenched, burgeoning bureaucracy has increasingly usurped powers, unauthorized by Congress.” The GOP called for radical reforms to “preserve personal liberty” and “improve efficiency.” But after Richard Nixon took office in 1969, he created the Environmental Protection Agency, which continues to epitomize arbitrary power and sow havoc throughout the land. Nixon vastly expanded the welfare state with his 1969 promise to “end hunger  in America for all time.” Food stamp enrollment increased eightfold under Nixon.  But a deluge of free food failed to end demands for more handouts.  Nixon’s failure was confirmed two years later when President Joe Biden pledged at a White House Summit “to end hunger in this country by the year 2030.” 

In 1980, Ronald Reagan ran the last major party presidential campaign that explicitly condemned federal power as a peril to individual liberty. In his 1981 first inaugural address, Reagan proclaimed, “In this present crisis, government is not the solution to our problem; government is the problem.” Reagan bloated federal power with one moralistic crusade after another, including expanding a war on drugs that helped quadruple America’s prison population and gutted the Fourth Amendment’s prohibition on warrantless unreasonable searches.  Reagan did nothing to curb the power of federal prosecutors, IRS agents, or environmental tinhorn dictators. 

Reagan did roll back federal power in a few niches. But at the end of his presidency, William Niskanen, his former chief economic advisor and chairman of the Cato Institute, raised the white flag: “Deregulation seems to be one of those things where the political costs are higher than the payoffs.”  By explicitly abandoning the traditional Republican opposition to deficit spending, Reagan paved the path to our current $36 trillion national debt.

President Bill Clinton was a master of “bait and switch” government reform. He announced a National Performance Review of federal agencies in 1993 to create a government that “works better and costs less.” The federal employee headcount was slightly reduced thanks primarily to the “peace dividend” of the end of the Cold War. The Clinton administration also offered lavish early pensions to many bureaucrats, assuring that they would be treated better in perpetuity than the taxpayers who supported their leisure. Clinton and Gore announced hundreds of goals and new standards but many were farces or shams.  Vice President Gore announced that no one would have to wait more than five minutes for service at Post Offices.  The Postal Service continued providing miserable service but fulfilled the Clinton-Gore mandate by removing the wall clocks from almost all Post Office lobbies – thus making it harder for people to know how long they waited. The Clinton administration also pledged that “your local first class mail will be delivered overnight.” The Postal Service responded by radically narrowing the definition of “local,” continuing its perennial intentional mail slowdowns. 

In his 1996 State of the Union address, Clinton sought to snare support from Republicans by proclaiming that “the era of Big Government is over.”  After he won re-election by campaigning as a moderate, he unleashed a dizzying array of spending and power grabs. In his 1997 State of the Union address, Clinton called for a “national crusade for education standards” and federal standards and national credentials for all new teachers; announced plans “to build a citizen army of one million volunteer tutors to make sure every child can read independently by the end of the third grade”; called for $5 billion in federal aid to build and repair local school houses, a new scholarship program to subsidize anyone going to college, a $10,000 tax deduction for all tuition payments after high school, and federal subsidies for private health insurance; demanded a new law entitling women who have had mastectomies to stay in the hospital 48 hours afterwards; advocated a constitutional amendment for “victims’ rights”; urged Congress to enact a law criminalizing any parent who crossed a state line allegedly to avoid paying child support; and proposed enacting juvenile crime legislation that “declares war on gangs,” hiring new prosecutors, and increasing federal spending on the war on drugs. Clinton also demanded that “character education must be taught in our schools” but he dropped that proposal after the Monica Lewinsky scandal erupted. 

In 2000, the Republican Party Platform proclaimed: “Since the election of 1860, the Republican Party has had a special calling — to advance the founding principles of freedom and limited government.” But President George W. Bush was more enthused on domineering public schools with his No Child Left Behind Act, vastly expanding Medicare, and boosting reckless mortgage lending that helped wreck the housing market. After the 9/11 attacks, Bush acted as if any limit on his power meant that the terrorists won. 

Trump’s current campaign to leash Leviathan is benefitting from widespread support from conservative writers and activists who view Trump’s own power as the best safeguard for American freedom. The New York Times noted a similar pattern in 1973 at the start of Nixon’s second term:  “Conservatives who have traditionally favored a strong Congress and a weakened Presidency are now advocating the reverse.” Nixon’s attempt to fix the federal government by radically centralizing power in the White House did not survive the Watergate scandal. 

Are Trump’s lawyers toying with legal nitroglycerine? The Trump administration is echoing the George W. Bush administration’s “unitary executive theory” to assert that the president effectively has untrammeled power over every executive branch employee. President Bush issued more than a hundred signing statements announcing that he would disregard specific provisions in legislation, thanks to “the President’s constitutional authority to supervise the unitary executive branch and to withhold information” from Congress and the American people.  Bush used that invocation to justify scorning congressional prohibitions on torture. The Bush administration presumed that “checks and balances” were archaic. But Bush’s legal power grabs helped make him intensely unpopular by the end of his reign and opened the door for Barack Obama to win the presidency by masquerading as a civil liberties savior. 

At this point, Trump and Musk are effectively using sweeping discretion to curtail the number of federal employees and euthanize brain-dead agencies. Their courage and resolution is a refreshing contrast to the usual useless Republican antics in Washington. But will their precedents prove perilous if the next president seeks to sweep away their positive achievements and deluge the nation with new intrusive decrees? 

Hopefully, Trump, Musk, and DOGE will continue electrifying and enraging Americans with one head-snapping federal horror story after another. More than ever, we need that “wholesale demolition of boondoggles.”  The latest fight to leash Leviathan can’t afford to fail because America has no more liberties and no more trillions of dollars to spare.

President Trump is bringing federal agencies to heel. Is the Federal Reserve next?

Our nation’s central bank jealously guards its independence from politics. Given its inflation-fighting and financial stability-preserving mandates, that might seem like a good thing. You don’t need a PhD in economics to see how political meddling in monetary policy or bank regulation could create economic chaos.

Yet Fed independence has been greatly overstated. Congress sets the Fed’s goals: it has tasked the Fed with delivering maximum employment and stable prices. Top Fed policymakers are selected by the president and approved by the Senate. Constitutionally, the Fed can’t be separated from politics. Elected officials have the last word. Our only choice is whether that authority is exercised responsibly.

Prior to the 2024 election, Trump lambasted the Fed for its interest-rate decisions. Stephen Miran, Trump’s nominee to chair the Council of Economic Advisers, recently co-authored a report that called for major Fed reforms to promote “accountability and democratic legitimacy.” While the Fed’s core duties remain off-limits to Trump’s regulatory overhaul, the administration clearly wants to subordinate the central bank to its political objectives.

Most commentators are worried about the effects a Trump-influenced Fed would have on the US economy. However, the ramifications are far greater for the world economy. The Fed’s role in maintaining worldwide dollar dominance hasn’t received sufficient attention.

We need to start looking at the Fed as a piece on a much larger policy chessboard. Trump’s radical departures from economic orthodoxy on tariffs and government investment suggest a new paradigm for international economic policy. The Fed would play a big part.

The president is a pragmatic dealmaker. His advisers have ambitious plans to restructure US trade and financial relationships with other countries. The bargainer-in-chief will support these plans insofar as they help preserve and strengthen his electoral coalition. So far, grand strategy has aligned with hardball politics. That means the Fed is ripe for picking.

The Fed’s Global Role

A globally focused Fed is best understood as a national underwriter of global dollar hegemony. All the world uses dollars, and foreign government organizations (such as central banks) hold large stocks of Treasury debt. The United States must constantly send dollars and debt abroad to satisfy world demand for assets.

The Fed, whether legally acknowledged or not, is responsible for ensuring adequate dollar liquidity and financial stability across the globe. Domestic policies have international spillovers.

The Fed also can significantly influence domestic borrowing rates, which affect the market for Treasuries. Since official foreign entities use Treasuries as reserve assets, these assets’ prices and quantities matter greatly for international solvency.

Monetary policymakers already know that the dollar and hence the Fed are major factors shaping the global economy. The Fed maintains swap lines with several other central banks, which help provide emergency dollar liquidity on short notice. It also operates international repo facilities, whereby counterparties can temporarily exchange their Treasury holdings for dollars.

A Trumped-up Fed

The critical difference under a Trump-realigned Fed is not about means but ends. Traditional international monetary goals would take a backseat to geopolitical considerations. Existing Fed facilities, policies, and governance procedures would focus less on stabilizing global markets and more on advancing national interests as determined by the president and his advisers.

Under the new monetary dispensation, expect the Fed to target government borrowing rates directly. It pegged Treasury yields during World War II to help the government keep capital prices low and predictable. The same would likely occur if a confrontation broke out with China, Russia, Iran, or North Korea.

The Fed could also intervene in foreign-exchange markets. Fed asset purchases or sales could be a tool for the government to achieve a desired price for dollars. This would be difficult since harnessing this power for strategic purposes would almost certainly invite reprisals. But if Trump and his allies are bold enough to repurpose the Fed, they’re likely bold enough to take their chances on targeted exchange rate interventions, too.

In addition, the Fed could use its bank-supervision duties to scrutinize banks with foreign ties. It operates Fedwire, a widely used payments processing and settlement system, and helps the Treasury monitor and enforce financial sanctions. Selectively denying payments and ensuring compliance with foreign-asset restrictions or freezes would become more frequent. 

The Peril of the Fed as a Geopolitical Tool

If all this sounds ominous, that’s because it is. The Fed’s transition from a domestic economic stabilizer to a geopolitical enforcer carries major risks. Most obviously, the additional need for expansionary monetary policy — to lower Treasury costs or hit an exchange-rate target, for example — would worsen inflation at home. Trump was elected largely on the promise to get price pressures under control. Keeping that promise would be hard if he unleashes the Fed on foreign foes.

Furthermore, the Fed’s imposition of costs on international rivals would weaken the appeal of holding dollars and dollar-denominated assets. It’s a catch-22: monitoring, sanctions, and payment denials are effective threats because everyone wants to use the dollar, but executing those strategies would lower the demand for dollars. The dollar’s lofty status is an invaluable American asset. The consequences of treating it cavalierly could be severe.

Part of the uncertainty hanging over the Fed is its own fault. There would not be a push to control the Fed if it had not done such an abysmal job stewarding the economy since the 2008 crisis. That doesn’t mean we should welcome the new monetary paradigm with open arms. The benefits of a Trumped-up Fed are speculative. The costs are real.

If top Fed decision-makers want to forestall a Trump takeover, the best thing they could do is bring inflation down and quit bailing out Wall Street every time it has to take a haircut. The political demands on the Fed will abate if monetary policymakers focus on their core duties and start performing them well.

At its core, economics is about making choices. We face trade-offs. If you want more of this, you must give up some of that.

Non-economists often ignore the trade-offs. For example, protectionists argue tariffs will help American industries compete with their foreign rivals while raising a lot of revenue for the American people.

Not so fast, say the economists. If tariff rates are low, most people will keep on importing. The government will collect tariff revenues on those imports, but the policy will not do much to protect American industries. If tariff rates are high, most people will stop importing. This may help those American industries that would otherwise face foreign competition, but it will not result in much revenue since so little gets imported.

Tariff Revenues

In a 2019 Journal of Economic Perspectives article, Mary Amiti, Stephen J. Redding, and David E. Weinstein considered the initial effects of the tariffs imposed by the Trump administration in 2018. The six waves of tariffs increased the average tariff rate by around 1.7 percentage points and reduced imports by 1.3 to 5.9 percent.

The monthly and cumulative tariff revenues estimated by Amiti, Redding, and Weinstein are presented in Figure 1. The authors estimate the additional revenue raised by the newly-imposed tariffs at around $15.6 billion in 2018. Furthermore, they find that “the US import tariffs were almost completely passed through into US domestic prices in 2018, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters.” The 2018 tariffs raised some revenue for the American people, but the revenue raised came almost entirely (and perhaps entirely) from the American people.

Of course, none of the tariffs imposed in 2018 were in place for the full year. Indeed, much of the increase in tariff rates occurred in the back half of the year. Since all of the tariffs were in effect by December 2018, we can multiply the December 2018 tariff revenues estimated by Amiti, Redding, and Weinstein ($3.2 billion) by twelve to get a rough estimate of how much these tariffs might be expected to raise per year going forward. Assuming no additional efforts to reduce one’s exposure to tariffs occur in subsequent years, the 2018 tariffs can be expected to raise around $38.4 billion per year — or, $46.8 billion per year in today’s dollars. For comparison, the federal government spent around $6,900 billion in 2024.

The estimated revenue raised by the 2018 tariffs is relatively small at around 0.7 percent of federal spending. Moreover, the revenue raised is largely (and perhaps entirely) paid by Americans. Higher tariff rates have a direct effect of raising tariff revenue. But higher tariff rates also discourage imports, which reduces tariff revenue. At some point, the latter effect dominates: higher tariff rates reduce tariff revenue.

Deadweight Loss of Tariffs

Economists are keen to cite another tariff trade-off, as well. Suppose the objective is to protect American industries. The higher the tariff, the bigger the disincentive to import. However, a higher tariff also raises the price prevailing on the domestic market — and the higher price will discourage some transactions from taking place. Economists use the term deadweight loss to denote the lost gains from trade that result when tariffs push up prices. You can increase protection for American industries, but only if you are willing to accept a bigger deadweight loss.

Amiti, Redding, and Weinstein also estimate the deadweight loss of the 2018 tariffs. Their monthly and cumulative estimates are presented in Figure 2. In total, they find that the six tariff waves reduced the gains from trade Americans realized by around $8.2 billion. As with revenues, we can get a rough estimate of the annual deadweight loss these tariffs might be expected to generate going forward by multiplying the December 2018 deadweight loss estimated by Amiti, Redding, and Weinstein ($1.4 billion) by twelve. Hence, the 2018 tariffs can be expected to reduce gains from trade by around $16.8 billion per year — or, $20.5 billion per year in today’s dollars.

The deadweight losses associated with the 2018 tariffs were relatively small: each US household loses roughly $156 per year. Higher tariffs would offer more protection for American industries but at a higher cost to Americans.

Tariffs and Income Taxes

Interestingly, there is one tariff trade-off many economists seem to overlook. Suppose the objective is to raise a given amount of revenue. You could impose a tariff. Or, you could impose a tax on income. The less you rely on tariffs, the more revenue you will need to raise from other taxes and fees, particularly income taxes, which account for the bulk of federal revenues. That’s how trade-offs work. 

The United States spends far too much today to rely exclusively on tariffs, of course. A 100 percent tariff on existing imports — that is, implausibly assuming no one was dissuaded from trading by the sky-high tariff rate — would generate just $4,110 billion (and much, much less under more realistic assumptions). Recall that the federal budget was around $6,900 billion in 2024. Still, there is a trade-off at the margin. We could rely a little more on tariffs and a little less on income taxes, or a little less on tariffs and a little more on income taxes.

Economists who oppose tariffs on the grounds that they generate a deadweight loss are ignoring an important trade-off. Income taxes also generate a deadweight loss. The relevant question is whether the marginal deadweight loss associated with the tariff is greater than the marginal deadweight loss associated with the income tax. It is at least conceivable that, given the relatively low tariff rate and the relatively high marginal income tax rates, the deadweight loss caused by a marginally higher tariff rate would be more than offset by the gains from trade caused by a marginally lower income tax rate.

The estimates from Amiti, Redding, and Weinstein imply that the 2018 tariffs generated around 44 cents in deadweight loss for every dollar raised, in addition to the dollar transferred (almost entirely or entirely) from Americans to their government. For comparison, Martin Feldstein estimated that a one-percent increase in all marginal income tax rates (e.g., from 15 percent to 15.15 percent, 25 percent rate to 25.25, and so on) would have increased the deadweight loss of taxation in 2001 by around 76 cents per dollar raised.

Before concluding that tariffs are a more efficient revenue-raising device on the margin, at least two caveats are in order. First, the marginal deadweight loss of tariffs and income taxes rise with the corresponding rates. That implies that the marginal deadweight loss of additional tariffs would exceed those estimated for the 2018 tariffs. Likewise, the estimates of the marginal deadweight loss from Feldstein should be updated to reflect potential changes from the status quo (e.g., expiration of the Tax Cut and Jobs Act) rather than an across-the-board increase from the 2001 income tax rate schedule.

Second, the marginal deadweight loss of tariffs estimated above does not include any costs associated with retaliatory tariffs levied by other countries. Amiti, Redding, and Weinstein find complete pass-through of foreign tariffs as well, indicating that retaliatory tariffs were similarly paid by those in the country imposing them. They do not estimate the deadweight loss of retaliatory tariffs in 2018, but note that “foreign retaliatory tariffs were also costing US exporters approximately $2.4 billion per month in lost exports” by the end of 2018. Since the corresponding deadweight loss would subtract the opportunity cost of lost exports from the value of lost exports, $2.4 billion per month can be thought of as an upper-bound estimate. Hence, the deadweight loss of retaliatory tariffs realized by Americans could be substantial — particularly in cases where the US imposes higher tariffs on many countries. If the opportunity cost was less than 57 percent of the value of imports, the deadweight loss of the 2018 tariffs per dollar raised exceeded the marginal deadweight loss of the income tax as estimated by Feldstein.

The aforementioned estimates should not be mistaken for rigorous policy analysis. They are rough-and-ready back-of-the-envelope calculations. That they cast doubt on the conventional view among economists should give one pause, though — and prompt economists working in public finance to take a closer look.

Economists usually have a keen eye for tradeoffs. They understand you cannot have your cake and eat it, too. It is surprising, therefore, that they have largely missed the tradeoff between tariffs and income taxes. It is not enough to say that tariffs are bad. One must also show that tariffs are worse than the available alternatives.

US government debt is growing faster than the economy. That is not sustainable. The government must get its budget deficit under control, but the political will to reduce spending is limited. That means the government will need to raise additional revenue. How should it go about doing that? Some want to let the Tax Cut and Jobs Act expire. Others want higher tariff rates. In order to decide which approach is best, we must consider the tradeoffs.

In January 2025, the AIER Business Conditions Monthly indicators showed moderate economic momentum, with leading indicators moderating, coincident measures remaining solid, and lagging indicators rebounding sharply. The Leading Indicator declined to 54, down from 71 in December, reflecting softening forward-looking economic activity. However, the Roughly Coincident Indicator held firm at 67, indicating steady real-time economic conditions, while the Lagging Indicator surged to 83, suggesting improving conditions in longer-cycle economic trends. The divergence between leading and lagging measures indicates short-term uncertainty, though the broader economy shows resilience for now.

Leading Indicator (54)

Of the twelve Leading Indicator components, six rose, one was unchanged, and five declined in January.

The largest increase came from United States Heavy Trucks Sales SAAR, which rose 8.2 percent, reflecting continued demand for durable goods and business investment in transportation equipment. However, some of this surge may be attributed to forward ordering as firms seek to preempt potential cost increases from upcoming tariffs. US Initial Jobless Claims SA (4.3 percent) and FINRA Customer Debit Balances in Margin Accounts (4.2 percent) also increased, indicating a still-resilient labor market and continued risk appetite in equity markets. Manufacturing new orders saw modest gains, with the Conference Board’s Manufacturing New Orders for Nondefense Capital Goods (ex-Aircraft) up 0.6 percent and the Manufacturing New Orders Consumer Goods & Materials Index up 0.12 percent, suggesting marginal strength in production demand. The Inventory/Sales Ratio rose slightly (0.01 percent), pointing to flat inventory management trends.

On the downside, housing activity remained weak, as US New Privately Owned Housing Units Started fell 9.9 percent, marking a continued slowdown in residential construction. The 1-to-10 Year US Treasury spread declined 8.3 percent, maintaining its deep inversion, historically a strong recession signal. Consumer sentiment weakened, with the University of Michigan Consumer Expectations Index down 5.3 percent, and Adjusted Retail & Food Services Sales Total SA down 0.9 percent, signaling softening consumer demand. Finally, the Conference Board’s Leading Index of Stock Prices fell 0.6 percent, reflecting equity market volatility and investor caution.

Roughly Coincident Indicator (67)

Four constituents of the Roughly Coincident Indicator rose and two declined.

The strongest increase came from US Industrial Production SA (0.5 percent). Conference Board Coincident Personal Income Less Transfer Payments rose 0.4 percent, indicating moderate income growth outside of government support. Labor market participation improved, with the US Labor Force Participation Rate up 0.2 percent and Nonfarm Payrolls increasing slightly (0.1 percent). These reflect ongoing, but slowing, job growth in January 2025.

However, consumer sentiment weakened, with the Conference Board’s Consumer Confidence Present Situation Index declining 2.9 percent, reflecting growing uncertainty about near-term economic conditions. Conference Board Coincident Manufacturing and Trade Sales declined slightly (0.2 percent), suggesting a modest pullback in real-time business activity.

Lagging Indicator (83)

Of the six components, five rose and one was unchanged. At 83, the Lagging Indicator is at its highest level in 25 months (December 2022).

The strongest gain came from US CPI Urban Consumers Less Food & Energy YoY (3.1 percent), reflecting a slowing of the disinflationary trend in core goods and services. Commercial and Industrial Loan activity improved (0.3 percent), and Private Construction Spending saw a marginal gain (0.01 percent), revealing tepidity in long-cycle business investment. US Manufacturing & Trade Inventories ticked up very slightly (0.003 percent), signaling careful, or perhaps hesitant, adjustments to inventory.

The only unchanged measure was US Commercial Paper Placed Top 30 Day Yield, indicating stable short-term credit conditions. The Conference Board’s Lagging Average Duration of Unemployment fell 7.2 percent, suggesting that unemployed individuals are finding jobs faster, a positive sign for the labor market.

The January 2025 AIER Business Conditions Monthly indicators reflect an economy still expanding but more slowly and with mixed signals. The decline in the Leading Indicator from 71 to 54 was driven by weakening consumer sentiment, slowing retail and food services sales, stagnation in manufacturing activity, and pressure from both a deteriorating housing market and tightening financial conditions.Notwithstanding that the Roughly Coincident Indicator (67) remained solid, and the Lagging Indicator (83) improved notably, indicating strength in slower-moving economic components like inflation, credit, and labor market recovery.

The divergence between leading and lagging indicators makes the rapidly escalating uncertainty in forward-looking economic conditions clear, though real-time and lagging measures suggest areas of ongoing resilience. The dual threat of wild, last-minute policy fluctuations ahead of April 2nd and the long-term consequences of what could be the largest tariff increase since the Smoot-Hawley Act of 1930 are now the primary forces shaping economic activity and financial market behavior.

DISCUSSION

February’s CPI report highlighted the effects of weakening consumer demand for discretionary goods, reinforcing broader signs of softening consumption. While services disinflation continued, goods price declines stalled, particularly in categories sensitive to tariffs including cars, home furnishings, and apparel. The overall impact of President Trump’s trade policies on inflation will depend on whether weaker services spending offsets rising goods prices. For now, the February data suggests that services disinflation outweighed the modest uptick in goods inflation, delaying any significant reacceleration in price growth.

US wholesale inflation stagnated in February, as a 1 percent decline in trade margins offset rising costs in key sectors, tempering the overall producer price index (PPI), which remained unchanged from January’s revised 0.6 percent gain. Excluding food and energy, PPI declined for the first time since July, though underlying price pressures persisted, particularly in categories tied to the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index. Hospital inpatient care costs rose 1 percent, portfolio management fees increased 0.5 percent, and core goods prices (excluding food and energy) climbed 0.4 percent—the largest monthly gain in over two years. While declining wholesale margins may temporarily shield consumers from higher import and manufacturing costs, sustained weak consumer confidence and pulled-forward durable goods purchases could weaken demand later this year, potentially forcing retailers to accept thinner profit margins. Tariffs imposed by the Trump administration are also set to exert upward price pressures, with an additional 10 percent levy on Chinese imports introduced in February contributing to notable price gains in iron and steel scrap, machinery, and household goods like furniture and appliances. Meanwhile, food prices surged 1.7 percent, driven by rising egg costs, while energy prices fell 1.2 percent. Despite these mixed inflation signals, a separate report showed jobless claims remained stable, reinforcing the resilience of the labor market.

February price data showed broad-based increases in both manufacturing and services, with multiple regional and national surveys reflecting stronger pricing power across industries. The ISM Manufacturing Prices Index surged to 62.4, its highest level since June 2022, up from 54.9 in January, while ISM Services Prices remained elevated at 62.6. S&P Global’s US Manufacturing sector recorded its fastest output price growth in two years, while US Services firms raised prices modestly, constrained by competitive pressures and weak demand. Regional Federal Reserve surveys further confirmed rising price pressures, with the Kansas City Fed reporting a third consecutive month of price gains in manufacturing, and its non-manufacturing sector also seeing higher selling prices. The New York Fed’s manufacturing prices received index jumped to 19.6 from 9.3, nearly doubling its six-month average, while its services counterpart climbed to 27.4 from 19.4. Similarly, the Philadelphia Fed’s manufacturing index increased to 32.9 from 29.7, while the Dallas Fed’s manufacturing prices received measure rose to 7.8 from 6.2. The Chicago PMI indicated an acceleration in price expansion, and the Richmond Fed’s manufacturing index showed a modest uptick, with prices received rising to 1.62 from 1.21.

While price pressures were broadly higher, select areas saw moderation. The Dallas Fed’s services sector reported a decline in selling prices, falling to 7.9 from 13.7, and the Philadelphia Fed’s non-manufacturing prices received index turned negative, dropping to -1.1 from -0.3. Richmond Fed services prices edged lower to 3.31 from 3.55. Overall, the data suggests persistent inflationary pressures, particularly in goods-producing sectors, with some signs of price relief in services. This supports a mixed inflation outlook, with price growth accelerating in manufacturing and remaining firm in services, despite isolated instances of easing.

Job growth in February 2025 exceeded expectations, with nonfarm payrolls rising by 151,000, led by gains in construction, manufacturing, health care, financial activities, transportation, and social assistance, while declines occurred in leisure and hospitality, retail, and government employment, particularly at the federal level due to a hiring freeze. The average workweek remained steady at 34.1 hours, contributing to a 0.3 percent increase in weekly earnings. However, labor market slack widened, with the unemployment rate (U-3) rising to 4.14 percent, reflecting an increase of 203,000 unemployed individuals. The U-2 rate, which tracks job losses, also climbed, while the broader U-6 measure of underemployment surged to 8.0 percent, indicating a rise in discouraged and involuntarily part-time workers. The labor force participation rate dipped to 62.4 percent as employment declined by 588,000, and transitions out of unemployment slowed, signaling weaker hiring momentum. Aggregate labor income rose 0.4 percent, largely on wage growth, but signs of labor market softening—particularly higher unemployment, an expanding pool of job seekers, and slower re-employment—reinforce expectations for a 75 basis point rate cut by the Federal Reserve in 2025 as economic conditions deteriorate.

US consumer sentiment fell sharply in early March, reaching its lowest level since November 2022, as concerns over tariffs and economic uncertainty weighed on confidence. The University of Michigan’s preliminary sentiment index declined to 57.9 from 64.7 in February, marking a steeper drop than any economist forecasted. Long-term inflation expectations surged by 0.4 percentage point to 3.9 percent, the largest monthly increase since 1993, while one-year inflation expectations rose to 4.9 percent, the highest since 2022. As President Trump’s tariffs expand, consumers across the political spectrum increasingly fear rising costs, with 48 percent of survey respondents mentioning tariffs unprompted, expecting them to drive future inflation higher. Households’ financial expectations hit a record low, and respondents assigned just a 48.7 percent probability to stock market gains over the next year, the weakest reading since May 2023.

Deteriorating confidence presents a growing risk to consumer spending, particularly in big-ticket purchases like homes, vehicles, and discretionary goods. The current conditions gauge fell to 63.5, a six-month low, while the expectations index dropped to its lowest level since July 2022. Political divisions were evident, with confidence among Democrats falling nearly 10 points, independents down 5.4 points, and Republicans slipping nearly 3 points. Economists warn that increased uncertainty over policy shifts and economic conditions is making it difficult for consumers to plan for the future, reinforcing fears that slowing confidence could curb household spending and contribute to economic downside risks in the months ahead.

Small-business optimism declined in February as inflation, policy uncertainty, and concerns over tariffs weighed on sentiment. The NFIB Small Business Optimism Index fell 2.1 points to 100.7, slightly below expectations, with the sharpest declines in economic outlook (-10 points), expected sales (-6 points), and expansion plans (-5 points). While job openings (+3 points), earnings trends (+1 point), and expected credit conditions (+1 point) improved, overall optimism remains well below December’s peak of 105.1, though still higher than the pre-election level of 93.7 in October. Hiring plans softened, with only 15 percent of owners planning to add jobs in the next three months, down 3 points from January, as retail, construction, and manufacturing faced the greatest labor shortages. Just 19 percent of businesses plan to expand in the next six months, reflecting lower expected sales (14 percent, down 6 points) and weak profitability trends (-24 percent). Inflation pressures intensified, with 32 percent of firms raising prices, a 10-point jump and the largest increase since April 2021, though businesses held off on preemptive pricing adjustments ahead of tariffs. Despite tax cuts and deregulation boosting the long-term outlook, high uncertainty is keeping small businesses in a wait-and-see mode, limiting hiring and expansion.

February retail sales fell short of expectations, reinforcing concerns about a slowdown in consumer spending, while weaker manufacturing and homebuilder sentiment further signaled softening economic momentum. Retail sales rose marginally, but seven of the 13 categories declined, including motor vehicles, electronics, apparel, and gasoline, with restaurant and bar sales posting their sharpest drop in a year. January’s figures were revised downward, marking the largest decline since July 2021. While e-commerce activity and healthcare spending lifted control-group sales by 1 percent, economists noted that seasonal adjustments played a significant role, limiting optimism for first-quarter GDP. Weaker income growth and rising job insecurity are likely curbing discretionary spending, particularly among lower-income consumers, while wealthier households may also cut back on major purchases following recent stock market volatility. Business caution is rising as New York state manufacturing activity dropped to its lowest level since early 2024 and homebuilder confidence fell to its weakest reading since August. Mounting uncertainty over tariffs, slowing wage growth, and deteriorating consumer sentiment increase the likelihood of weaker economic expansion, with some analysts warning that first-quarter GDP growth could contract.

US manufacturing activity in February edged closer to stagnation, with orders and employment contracting even as input costs surged. The ISM Manufacturing Index slipped 0.6 points to 50.3, while prices paid for materials jumped 7.5 points to 62.4, the highest since June 2022, signaling renewed inflationary pressures. New orders fell 6.5 points to 48.6, the first contraction since October 2024, and factory employment dropped 2.7 points to 47.6, marking contraction in eight of the past nine months. Rising costs, largely driven by tariff-related supply disruptions, are creating backlogs and inventory imbalances, with businesses struggling to pass on price increases amid softening demand. Imports climbed to 52.6, the highest since March 2024, as firms ramped up orders ahead of Trump administration tariffs on Mexico and Canada set to take effect Tuesday. Meanwhile, headline industrial production surged 0.7 percent, largely due to a 4.3 percent jump in consumer durable goods output, led by a sharp rise in automotive production. Manufacturing production expanded 0.9 percent, while business equipment output rose 1.6 percent, continuing its strong growth since November. Capacity utilization increased to 78.2 percent from 77.7 percent, as factories ramped up activity. The surge in production may reflect firms front-loading output before tariffs disrupt supply chains, suggesting a potential slowdown ahead. However, with Trump administration policies focused on onshoring and boosting domestic manufacturing, industrial activity may continue to receive moderate tailwinds despite near-term volatility.

In February and early March of 2025 the US economy showed mixed conditions. Moderate consumer spending growth, stable vehicle sales, and resilience in financial services were evident but clear signs of strain in manufacturing, construction, and agriculture are becoming clear. Holiday retail sales exceeded expectations, and nonfinancial services, including leisure, hospitality, and transportation, expanded modestly, particularly in air travel. Commercial real estate saw slight gains, and lending activity remained steady with little deterioration in asset quality. However, construction activity declined as high material and financing costs dampened growth, and residential real estate remained stagnant due to elevated mortgage rates. Manufacturing slipped slightly, with firms stockpiling inventories in anticipation of higher tariffs and truck freight volumes fell, signaling weaker goods demand. Rising delinquencies among small businesses and lower-income households raised concerns about financial stability and the overall disposition of consumers. Agricultural conditions remained weak, with low farm incomes and weather disruptions adding pressure.

The huge surge in consumer and business optimism seen in November 2024, driven by disinflationary progress and strong corporate expectations of pro-business policies has steadily eroded in the face of skyrocketing uncertainty. By February and early this month stubborn inflation, weakening employment trends, and clear signs of consumer distress have fueled a sharp reversal in sentiment. Record levels of policy instability—marked by an unprecedented pace of executive orders, shifting tariff threats, and mounting regulatory uncertainty—has further compounded economic unease, disrupting business planning and investment. With the Trump administration’s full slate of tariffs set to take effect on April 2nd, trade flows, input costs, and corporate strategies face the potential for significant upheaval.

With businesses and households increasingly moving to the sidelines amid mounting economic uncertainty, concerns over the likelihood of a recession have risen sharply. Public discourse on the subject has intensified, and while the ultimate outcome remains uncertain, these concerns may not be premature. Given the current policy and economic landscape, strong caution is warranted.

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