Several weeks ago we asked Starbucks, at its annual meeting, about whether this shift away from straws actually created value for shareholders. Their response? “We have not disclosed the financial impact of strawless lids.”

The fundamental question we were asking was about the sustainability assumption: that you can go green and make green at the same time. That you can save the planet by recycling more, while not affecting your shareholder return. And now, one of the biggest brands in the world is making it clear: we won’t even tell our own shareholders whether the sustainability assumption is true. Go away.

Several years ago, the coffee giant made a bid to phase out their routine usage of plastic straws in favor of strawless lids. The rationale? As per Starbucks, “sustainability.” And yet the result, at least immediately, was anything but. Analysis from Reason Magazine’s Christian Britschgi revealed that the ‘strawless’ replacement actually used more plastic than the straw/lid combo, and Starbucks only fixed the problem years later — already evidence in favor of its sustainability strategy being more vibes than sound business analysis.

As it happens, that’s an industry-wide problem.

The narrative on plastic use is ingrained deep within the corporate psyche. 72% of the top 300 companies in the world have made commitments to reduce plastic use, with many setting specific targets for reducing plastic waste in their production chains. From tech giants like Google to food producers like Mars Inc, recyclable/reusable plastic is an issue that the world’s largest companies are hell-bent on opining on and making commitments to “fix.” But are their solutions working — even by their own standards? 

The Half-Truth of Biodegradable Plastics

Let’s take biodegradable plastic — plastic that presumably breaks down to its base components more quickly than traditional plastic options. Major brands have tested the concept, including producers like McDonald’s and PepsiCo. And yet, what’s the basic assumption behind biodegradable plastic? That the material will actually degrade faster in the environment. As per one analysis, “Biodegradable plastics decompose in environments such as soil or water, or in compost. In other words, creating an environment conducive to microbial activity is crucial for plastics to decompose effectively.”

Yep. We knew that. And yet, here’s a 2015 report from the United Nations Environment Programme: “some plastics labelled as ‘biodegradable’ require the conditions that typically occur in industrial compositing units, with prolonged temperatures of above 50°C, to be completely broken down. Such conditions are rarely if ever met in the marine environment.” So… the key assumption behind biodegradable plastics (aka their biodegradability) is precisely the assumption that has yet to be proven.

131st Time’s the Charm for Reusable Shopping Bags

Let’s take another example: reusable shopping bags.

Retailers like IKEA, Whole Foods, and Patagonia have either outright banned plastic bags or taken significant steps to encourage customers towards using reusable bags made out of materials like cotton. The assumption here: the reusable bag has less of an environmental footprint than the plastic bag. And yet the reusable bag strategy is fraught with problems. For one, many of the alternatives are made out of biodegradable materials (see above discussion about some of them only degrade if consistently kept above 120 degrees Fahrenheit which, surprise surprise, doesn’t consistently happen in nature). For another, the amount of times you have to reuse a bag to offset the environmental impact is astronomical — one UK analysis from the Environment Agency found that “cotton bags should be reused at least… 131 times respectively to ensure that they have lower global warming potential than conventional carrier bags that are not reused.” One hundred and thirty-one times just to break even.

This is the Moment to Question ‘Sustainability’

What’s the next move? As ESG, DEI, and the corporate activist agendas that accompany them fall out of favor, true believers in sustainability could bother to make a serious business case for why actually reducing plastic (and not just saying you’re doing it) creates brand value for its owners, the shareholders. Or (and this is more likely) they’ll make the moral argument: that the ineffective policies and questionable-at-best impacts of the corporate sustainability obsession were justified because… wait for it… they were trying to do the right thing.

Do DEI programs actually help — or are they often designed to make consultants money as opposed to fix prejudice? Does ExxonMobil really need to do less business in oil and gas — or did a bunch of activists just make that up? Many of the questions that ESG and DEI-aligned activists consider asked and answered are, in fact, just loudly stated claims that almost no one has the guts to seriously challenge — claims that corporate engagement firms like us, as advocates of markets and fiduciary duty, have a responsibility to be questioning. And maybe the biggest claim that deserves questioning is this one: are corporate ‘sustainability’ practices actually…. Sustainable?

Life is full of moments in life where we realize: I’ve always assumed that was true — but is it? 

Asking a simple question about the structure of a business can be the difference between investing in a successful start-up and sinking thousands into a scam. Asking a simple question about the details of a story you’ve been told can reveal a web of dishonesty. It’s an unfortunate reality that many dysfunctional systems, from the scam to the cult to Ponzi scheme, operate on premises that were never true, but that people just assumed to be so.

All things come with tradeoffs, a simple reality that sustainability experts understand. You can ban plastic straws, but paper ones come with their own cost, including environmental ones. 

University of Michigan researchers recently examined the trend of sustainability-minded consumers from single-use plastics to reusable products, such as bamboo drinking straws. Remember the assumption: that sustainable products, with enough use, have less environmental impact than disposable ones. The UM researchers, however, found that some products, like beeswax wrap (an alternative to plastic wrap), silicone bags, and bamboo drinking straws never end up being better on environmental impacts like energy usage and water consumption. UM environmental engineer Shelie Miller summed up the study’s findings: “Don’t always assume that reusable is the best option,” Miller said. “Some reusable alternatives never break even because it takes more energy, and generates more greenhouse gas emissions, to wash them than it takes to make the single-use plastic item.” It’s the assumption game — and far too many corporations banked on that assumption because a loud cadre of activists told them they shouldn’t question it.

The best time to question the fundamental assumptions of the sustainability narrative was years ago, before corporate policies started being made in its image. The second-best time is now. And when the only answer we consistently get to these questions is diversion and secrecy…maybe the scrutiny’s overdue.

In July 1959, at the American National Exhibition in Moscow’s Sokolniki Park, Vice President Richard Nixon stepped into a model suburban kitchen and found himself in a now-famous impromptu exchange with Soviet Premier Nikita Khrushchev. 

Known as the “Kitchen Debate,” the moment became emblematic of Cold War tensions — not over missiles or military power, but over washing machines, color televisions, and the promise of frozen orange juice. Nixon used the showroom kitchen to champion the market economy, arguing that capitalism’s genius lay in offering ordinary citizens a growing array of affordable comforts. Khrushchev scoffed, calling it all frivolous and morally hollow compared to the Soviet system, which he claimed prioritized basic needs over material excess. Once widely known, the moment remains etched in Cold War history — not least because of Nixon’s later, troubled exit from the presidency.

While that Cold War moment became cultural shorthand for the difference between liberal economic systems and centrally planned ones, echoes of Khrushchev’s arguments are now emerging from unexpected places — including the highest levels of the US government, where the President recently suggested that American children might need to “be happy with two dolls instead of 30” if tariffs raise the prices of toys. 

“We used to make toys in this country,” he added, implying that curbing imports and reducing consumption are necessary sacrifices for revitalizing US industry.

That shift in rhetoric — from abundance to austerity, from choice to control — deserves far closer scrutiny than it has been given. Within the last two months, US Treasury Secretary Scott Bessent expressed the view that affordability is not part of the American project. This new twist, that Americans should embrace fewer goods in the name of national policy, may sound like hard-nosed industrial strategy, but it’s simply protectionism repackaged as virtue. 

Philosophically, it expresses a form of economic collectivism that runs contrary to the very system that made American kitchens, stores, and lives the envy of the world.

The Illusion of National Self-Reliance

Tariffs are taxes. They’re imposed not on foreign producers, as political rhetoric commonly suggests, but on American consumers and firms that buy imported goods. If the US government raises tariffs on toys, the cost doesn’t fall on a factory owner in Shenzhen: it falls on the American parent buying a birthday present at Target, as well as wholesalers and retailers managing slimmer margins.

Tariffs are often justified as tools to protect domestic jobs or rebuild domestic industries. But the track record is dismal. When tariffs raise prices, consumers reallocate spending away from more efficient producers toward less efficient ones. That may benefit a few politically favored sectors in the short term, but it leaves the broader economy poorer and less dynamic over time. Moreover, modern supply chains are by their very nature deeply globalized. 

Domestic industries rely on imported components, materials, and equipment. Tariffs intended to “help American factories” often end up increasing their input costs, undercutting competitiveness, and reducing innovation. A policy meant to create jobs instead destroys them. 

The 2002 Bush steel tariffs depict that trade-off starkly:

President George W. Bush imposed tariffs on a variety of steel products beginning in March 2002 and lasting for three years and one day. The rates ranged from 8 percent to 30 percent on certain steel product imports from all countries except Canada, Israel, Jordan, and Mexico. These tariffs affected products used by US steel-consuming manufacturers, including: producers of fabricated metal, machinery, equipment, transportation equipment, and parts; chemical manufacturers; petroleum refiners and contractors; tire manufacturers; and nonresidential construction companies. This definition of steel consumers is conservative, as many other industries are also consumers of steel.

The vast majority of the manufacturers that use steel in their business processes are small businesses. Ninety-eight percent of the 193,000 US firms in steel-consuming sectors, at the time of the Bush steel tariffs, employed less than 500 workers, according to the above study. The effects of higher steel prices, largely a result of the steel tariffs, led to a loss of nearly 200,000 jobs in the steel-consuming sector, a loss larger than the total employment of 187,500 in the steel-producing sector at the time.

Thus, a policy intended to protect steel jobs ended up causing larger job losses in downstream industries and made goods less affordable across the board.

From Industrial Policy to Collective Sacrifice

At its core, the recent wave of protectionism is not about efficiency or economic growth. It’s about national control — about engineering particular outcomes, even if they come at the expense of consumer welfare, business autonomy, and global integration. That’s where the comparison to Khrushchev becomes more than rhetorical.

When a political leader tells citizens they should be content with fewer toys, fewer choices, or less convenience — all in the service of a broader policy agenda — we are no longer in the realm of market economics. We are in the realm of planned outcomes and collective sacrifice. And that is the operating system of command economies: individual preferences and price signals are subordinate to political imperatives.

Of course, the modern American version doesn’t come wrapped in socialist slogans. It comes in the language of economic nationalism and reindustrialization. But the mechanism is the same: centralized decisions about what gets produced, what gets consumed, and terms upon which who is allowed to benefit.

The Forgotten Lessons of Choice

Two levels of irony are at work. In 1959, Khrushchev argued that the US emphasis on choice was wasteful. Nixon countered that it was the essence of freedom. Today, some voices on the American right and even some libertarians are repeating Khrushchev’s mistake — dismissing the vast benefits of variety, innovation, and consumer sovereignty as frivolous. 

Even more ironic are messages from the current US President encouraging asceticism, coming as they do from a man evincing a high degree of comfort, indeed an affinity, for spirited decadence.

Market economies are not about “30 dolls” versus “two dolls.” They are about letting individuals decide what they want, what they value, and what they’re willing to pay for. They are about discovery, experimentation, and progress. They are feedback between producers and consumers, sent through the price system, profit margins, and competitive jostling; not uniformity and constraint.

Policies that limit choice, raise prices, and redistribute economic control to political authorities are neither a reinvention of the market or a novel rejiggering of it. They are its repudiation. Pursued far enough, they risk reviving not the glory days of American manufacturing, but the gray sameness of the planned economy Nixon once stood against — kitchen after kitchen, refrigerator by refrigerator, and toy by toy.

Before I review The Quantity Theory of Money: A New Restatement (PDF) chapter-by-chapter, allow me to put things into context. Tim Congdon is the deepest thinker in this field and one with enormous experience as a banker with real skin in the game. If that weren’t enough, he started his career as an economics journalist at The Times in the 1970s. In short, unlike most economic writing, his book is readable. Following his work at The Times, he founded Lombard Street Research, when I first became acquainted with him. At the time, I was strategizing and trading at Friedberg Mercantile Group, a broker-dealer in Toronto, where I am currently chairman emeritus. He kept me well-supplied with his writings, and I gave them my most careful and anxious attention. Why? Because his forecasts were usually right — and often very contrary to the consensus.

During the Thatcher years, when monetarism was introduced to the United Kingdom, Congdon was at the center of things as a high-profile monetarist and forecaster, and one of the Chancellor of the Exchequer’s “Wise Men.” Finally, it was Congdon’s work, particularly Money in a Free Society — a book which I spent several weeks in Paris studying and corresponding with Congdon on — that incited my transition from a recipient to a supplier of monetary research.

Today, I have the privilege to serve on the Academic Advisory Council of the Institute of International Monetary Research at the University of Buckingham, which Congdon founded in 2009.

In the first half of the book — namely, Chapters 1 through 6 — Congdon lays out his restatement of the quantity theory of money, how he arrived at it, and the related consequences of that restatement. He delineates how changes in the stock of broad money are transmitted through asset prices, the real economy, and the price level.

Perhaps the most important contribution of these chapters is Congdon’s analysis of how changes in the stock of money affect variable-income assets — such as real estate and equities — differently than fixed-income assets (bonds). In Congdon’s view, variable-income assets are the best measure of households’ preferences — who in his terms are the “ultimate wealth-holders” — rather than the fixed-income markets dominated by institutional investors. In fact, when we make the reasonable assumption that the incomes paid on variable-income assets are a constant ratio of GDP, Congdon’s “proportionality postulate” — or the idea that changes in the quantity of money and nominal GDP are equi-proportionate in monetary equilibrium — is clearly a useful tool in explaining how changes in monetary policy are transmitted to those asset prices.  

Using empirical data, Congdon goes even further to assert that the relationship between money growth and fixed-income asset yields is dominated by variable-income assets, and contends that Keynes’ development of the problematic liquidity preference theory of the rate of interest influenced Paul Samuelson into bamboozling “three generations of economists into believing that bond yields held the key to understanding macroeconomic instability.” His conclusion rings true in an era dominated by direct central bank manipulation of bond yields. Contrary to the view of every “Dick, Tom, and Harry,” monetary policy is not about interest rates; rather, it is about changes in the money supply, broadly measured. And when it comes to the money supply, Congdon is clearly a broad-money, not a narrow-money, monetarist.

Another invaluable nugget in these chapters is Congdon’s exposition on credit counterparts analysis, which explains changes in the money supply as a function of changes in the composition of banks’ assets. Indeed, Congdon is one of the few who recognizes the importance of credit counterparts analysis — and knows how to do it.

In Chapter 7, Congdon analyzes the empirical evidence for his restatement of the quantity theory. Indeed, he finds that the evidence is “overwhelmingly” in favor of the quantity theory. Most interestingly, however, he finds that in the United States and G20 countries, households’ money typically increases slightly faster than households’ income, which violates the proportionality postulate. Here he conjectures that this is because, as economies develop, the frequency of financial transactions (and hence, the need for money) grows more rapidly than incomes. I look forward to Congdon developing this causal mechanism in further articles and books.

In Chapters 8 and 9, Congdon examines the evidence for the quantity theory, particularly during the COVID-19 pandemic, in the United States and United Kingdom, respectively. In my opinion, the most interesting parts of these chapters are his comments on the two countries’ central banks; namely, the fact that both the Federal Reserve and the Bank of England lack a coherent theory of national income determination — or at the very least, neglect the quantity of money.

Notably, he highlights the fact that the Bank of England used large relative price changes (read: not inflation) during the pandemic as an excuse to ignore the absolute price level (read: actual inflation). Congdon concludes that central banks are using the wrong model, the three-equation New-Keynesian Model, which has been popularized over the last three decades and does not include a monetary aggregate. Indeed, central banks have shoved the quantity theory aside.

Chapter 10 is a comparison of Milton Friedman’s quantity theory with the author’s restatement. It makes clear that Congdon’s restatement of the quantity theory is a necessary update for the twenty-first century. Congdon is quite right to alter the quantity theory to accommodate the new — and (in some cases) innovative — ways that money is created in a modern economy, as opposed to 1956, when Friedman published his own restatement.

In Friedman’s view, the supply of money is determined by a “money multiplier” applied to the monetary base, while Congdon allows the money supply to be determined by demand for credit, which comports with the fact that commercial banks create the vast supply of money in modern economies through their lending. He also makes the crucial point that broad measures of money must be used to make the quantity theory work. Indeed, this approach allows for a singular account of the transmission mechanism to be proffered. 

In Chapter 11, Congdon wraps up his treatise by recalling Keynes. Did Keynes really hate the quantity theory? Congdon answers that question in the negative. This section is crucial in order to place Congdon’s work — and that of other quantity-theory adherents — in the context of the history of economic thought.

Anyone interested in national income determination, asset markets, real economic activity, or inflation would be well-advised to study The Quantity Theory of Money: A New Restatement carefully. Indeed, this book is required reading for all of my students. 

It’s clear from his book that Congdon not only knows more about the quantity theory than most monetarists, but also possesses a deeper understanding of Keynes than most Keynesians.

The Constitution, or at least talking about the Constitution, is typically a centerpiece in many contemporary political discussions. This is especially true in the past few years, and in recent months it is not uncommon to see many wringing their hands that the US is undergoing what they call a constitutional crisis due to Donald Trump’s return to the presidency.

I would contend that we are indeed in the midst of a constitutional crisis, but not the kind that leftist pundits are discussing in the media.

Ultimately, there are always two constitutions that govern a society. There is the formal constitution, either a specific written document or a body of norms and traditions, and there is the informal, or rather, internal, constitution that governs the hearts of the people that make up said society.

The framework of the American Constitution, with its attempt to establish checks and balances and a system of decentralized federalism, is no doubt a solid work of applied political theory that attempts to establish an institutional environment conducive to an free, yet orderly, society.

But this institutional environment can only do so much. In the end, a constitution can only govern a people who themselves have established within themselves a constitutional disposition.

By constitutional disposition, I do not mean that one reveres and seeks to uphold the formal constitution. In the same way that a formal constitution seeks to establish limits on what the government is able to do, a constitutional disposition seeks to restrain and subdue man’s lower nature and supplant it with man’s higher nature. 

This necessity of inner control is not always popular. It has been in vogue for the past 200 years to assert that the fundamental nature of man is good and pure, it has merely been corrupted by society or capitalism, or whatever else people tend to disfavor at the moment. Jean Jacques Rousseau, the French Enlightenment philosopher and intellectual father of the French Revolution, is the most influential of these thinkers in the modern age, though similar strains of thought can be found at various times in history all around the world.

For Rousseau, man in the state of nature is good but he has been corrupted by society. This is the logic behind his widely shared quote “Man is born free, but everywhere he is in chains”. This is the freedom of the “noble savage”. Rousseau sought to reclaim this freedom for man by rejecting limits and restraints and leaving man’s raw will unchecked.

Rousseau himself exemplified this in his personal life, notably chucking all his unfortunate children into horrible eighteenth century orphanages so that they would not interfere with his dissolute life. Children, family, marriage, norms, and customs are all the shackles holding him back from his innate goodness, don’t ya know?

In contrast to this Rousseauian spirit, there exists a much older and universally held understanding of morality. Under this older way of thinking, morality essentially boils down to the personal struggle to establish an inner check on one’s base appetites and desires, and, through long struggle, to elevate one’s higher nature. It is upon this self-discipline that all of civilization rests.

This mastery of one’s base appetites through inner moral struggle is an essential part of Plato’s Just Man, Aristotle’s Spoudaios, Confucius’ Junzi, and Stoic, as well as much early Christian, thought.

It is this self-mastery that forms a constitutional personality. Such a disposition helps to maintain and even spread order throughout all of society. Without such order, life in a free society is impossible, as disorder prompts instead the rule of the jungle and, in turn, efforts to restore order at any cost.

Unfortunately, the inner check is out, and Rousseauiann ”freedom” is in, these days. 

While most people are unlikely to know much about Rousseau, his spirit lives on, seemingly more and more, in American culture today. The ethos of “if it feels good, do it” or “what’s the harm, I’m not hurting anyone” has become second nature to us.

Such an ethos is not conducive to the constitutional governance of society. It is little wonder that our formal constitution is feeling the strain of the present political era; it is bearing a load that it was never meant to handle.

The inner constitution is not a matter of grand legal battles in the Supreme Court. It is ultimately a battle for the disposition of one’s soul and is manifested in the small episodes of daily life that on their own seem to be insignificant, but when accumulated, come to shape who we are and the overall effect we have on the world.

Returning one’s shopping cart to the cart return, not spitting gum on the sidewalk, and not littering are, in the grand scheme of things, not significant events in the great arc of human history. But these small choices become habits that form our personality and our interactions with all of society. Few people control immense levers of government power, but through ordered living in our personal lives, which is the only thing truly under our control, we not only rightly order ourselves, but in doing so help to spread ripples of order to the people whose lives intersect with ours.

This understanding of order dates back millennia, but so too does the understanding that without order, of one kind or another, social life is impossible. If order is not maintained from within, through the inner check on one’s base appetites, then it will inevitably be established from without via physical force. When this happens we can say goodbye to the cherished traditional rights and liberties that we have enjoyed here in America.

The future of America will not ultimately be decided by our formal constitution, important though it may be, but by the small choices each of us make every day that is writing, unseen in the depths of our hearts, our internal constitution that governs our daily lives.

The main principle of trade policy is make or buy.  

“Economics” comes from the Greek word oikonomia, deriving from oikos, meaning “house” or “household,” and nomos, meaning “law” or “rule”. Thus, oikonomia originally meant “prudent household management,” including labor, finances, and property, to ensure stability and self-sufficiency for the family. Over time, the term expanded in scope and came to describe broader systems of resource management, eventually evolving into the modern concept of “economy.” Philosophers like Xenophon and Aristotle explored oikonomia in contrast to chrematistics, or wealth acquisition for its own sake.

The farmer/poet Hesiod tells of how his father was obliged by poverty to move from Boeotia to Cyme: 

One day, he came to this place right here, having crossed a great stretch of ocean. He left behind him the Aeolic [city of] Kyme, sailing on a dark-colored ship, fleeing not wealth, not riches, not material bliss.  No, he was fleeing wretched kakē, which Zeus gives to men. And he settled down near Helikon, in a settlement afflicted with human woes, Ascra by name. It is a place that is kakē in the wintertime, difficult in the summertime. It is a place that is never really good.  (Hesiod, Works and Days, 640)

The Greek word kakē has no single English equivalent; it can variously mean poor, bad, or malignantly evil.  In this case, Hesiod intends it to mean “scarcity,” a crushing want of sufficient resources that keep people in poverty.  Hesiod thinks that kakē is the usual state of humans, because poor people have to make everything for themselves. This is exhausting, so if it is possible to buy something cheaper than we can make it ourselves, prudence dictates that we do it.

It is exactly this problem, the management of the resources of a household in the face of crushing scarcity, that led the famed chair of the London School of Economics, Lionel Robbins, to offer this definition:  ”Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

The point of this long introduction is that scarcity effectively increases the cost of waste, and of  misused assets and effort. In times of plenty, or for the wealthy, squandering valuable resources may go unnoticed. But in times of scarcity, when things are bad in the wintertime, difficult in the summertime, and never really good, it is important to make the best use of every resource we possess.

It is precisely that problem of “making the best use” that brings the “make or buy” decision to the fore. In many households, someone does the shopping and then cooks meals. In other households, meals are usually takeout deliveries or things that can simply be served straight from the cupboard. Some people mend clothes themselves, some send the clothes out to a tailor. Generally, if the cost of making something at home is less than the cost of obtaining it in the market, then economics would suggest the household is better making the item. In times of scarcity, people may be forced to act “as if” they were economists, because otherwise they will be even poorer.

Ronald Coase famously pointed out that firms face exactly the same decision calculus: firms make things that they can sell for more than the costs of production. But the inputs to those manufactured items can be made by the firm, or can be purchased on the open market. It might seem like the firm is “losing money” if it buys inputs, but the problem of scarcity is raised again: spending the capital, and the labor time that the firm has contracted for, on items that could be purchased at a lower cost, is a loss of profits. A firm might make its own electric motors for a product, but it is unlikely to mine and smelt the copper that goes into those motors. And it almost certainly does not grow and mill the flour that goes into the bread in the employee cafeteria; in fact, the firm likely buys the bread, and maybe even the sandwiches, from a contractor.

This principle is very general, and once you start to think in “make or buy” terms it will change the way you think about the world. The pressure the choice puts on firms, and the opportunity given to households by the option to buy rather than to be self-sufficient, are both central to why commercial society is so successful.

Oliver Williamson, the Nobel-prize winning economist, said “I originally thought of ‘make-or-buy’ as a stand-alone problem. But now I think of it as being an exemplar. If you understand make-or-buy, which is a simple case, you can understand more complex cases.”

At the outset, I said something more. I said that the make or buy decision is the key to understanding trade policy. As far as I know, the first thinker to make this argument explicitly was Adam Smith, in The Wealth of Nations. Smith discussed how households decide what to make for themselves, and what to buy in the marketplace. The paradox is that it can cost much more to make something yourself, if someone else can make it more cheaply.

You may have had this experience yourself. To “save money,” I decided to grow tomatoes. I spent a lot of money and time preparing the ground and cultivating the plants, and then spraying bugs and trying to prevent rot when it rained too much. My wife calculated the total costs, including my time, and to this day laughingly refers to my “$100 tomatoes.” I didn’t save money at all; in fact, by making the thing instead of buying it, I lost both the expense of the making, and the value of whatever I could have been doing instead.

Smith recognized that the principle is very general, and extends beyond the household. As Smith put it: 

What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. Adam Smith, Book IV, Chapter 2.

It is very tempting to believe that a nation should try to be self-sufficient, in all things. After all, that way “we keep the money and the jobs here at home.” But as I have argued before, those are spoon jobs, not jobs that pay well or produce wealth or prosperity. As Adam Smith recognized, and as we should remember, trying to make everything and buy nothing makes you poorer, not richer.  Those $100 tomatoes were quite tasty, but they weren’t worth what I saved by not buying them.

Ronald Reagan is, famously, known for being a free trader, a globalist perhaps, in today’s parlance.  He believed very firmly in the importance of American industry but also believed that American industry was best served by lowering our barriers to trade, not by erecting new ones through protectionist policies. A cornucopia of evidence has borne out exactly one thing: he was correct.

But still, for all his speeches and conviction on free trade, Reagan famously compromised in one, major way: Japanese automobiles. Reagan recounted the dilemma he faced in his autobiography: 

Although I intended to veto any bill Congress might pass imposing quotas on Japanese cars, I realized the problem wouldn’t go away even if I did. The genuine suffering of American workers and their families made this issue intensely charged politically. And the protectionists in Congress had some powerful ammunition on their side: there was plenty of evidence that the Japanese weren’t playing fair in the trade arena. They refused to let American farmers sell many US agricultural products in Japan, and they imposed subtle but effective barriers that eliminated many of our other products from the Japanese marketplace: American cigarette companies, for example, could advertise their products only in English in Japan.

New Right thinkers like Oren Cass have pointed this out numerous times, calling Reagan a “protectionist” and holding this example up as a paragon of the incredible benefit of protectionism done right.  He is not alone in this. In 1988, Sheldon Richman, then at The Cato Institute, called Reagan, “the most protectionist president since Herbert Hoover, the heavyweight champion of protectionists.” In 2017, Victor Davis Hanson referred to the actions of President Trump during his first term as “a return to, or a refinement of, Reagan’s and the elder Bush’s principled realism: the acceptance that the United States has to protect its friends and deter its enemies.”

However, in doing so, these people fundamentally miss the forest for the trees.  They look only at the actions of the man without understanding the context within which they took place and the actual (as opposed to the imagined) choices that Reagan and his team faced.

Understanding Context

When Reagan took office in 1981, the US economy was in the throes of one of the most severe economic downturns since WWII, characterized by high inflation, rising interest rates which peaked at an incredible 20%, and an overall weak economy still reeling from the 1980 recession. Particularly hurt by all of this were US automakers and their union workers, especially as we consider that this was also a time where cheaper, Japanese made cars began flooding the US market.

Faced with pressures from domestic automakers, the unions, and a protectionist Congress demanding that the administration “do something,” Reagan established an Auto Task Force to come up with a solution that allowed him to remain committed to free enterprise and avoid import quotas. In a statement given on April 8, 1981, then-Vice President Bush announced, that the White House is not “suggesting to the Japanese what they should voluntarily do” and that “[The administration wants] to avoid starting down that slippery slope of protectionism.” 

The Japanese foreign minister was invited to the Oval Office on March 24 where in Reagan’s words, “I told him that our Republican administration firmly opposed import quotas but that strong sentiment was building in Congress among Democrats to impose them. ‘I don’t know if I’ll be able to stop them,’ I said. ‘But I think if you voluntarily set a limit on your automobile exports to this country, it would probably head off the bills pending in Congress and there wouldn’t be any mandatory quotas.’” 

The result of these negotiations occurred “when Japan announced it was going to voluntarily limit its exports of motor vehicles to this country to 1.68 million a year” for 1981-1983. According to Reagan, Japan’s “policy paid off” and ultimately “defused the momentum in Congress to impose quotas, which would have been the first shot of a serious international trade war” (An American Life, 274).

Context in Reagan’s decision matters.  He saw that a protectionist bill was coming and that, even if he vetoed it, “the problem wouldn’t go away.”  The problem here does not refer to “Japanese cars” but to the protectionist demands of Congress.  Rather than let Congress have what it wanted, Reagan diffused the situation by asking Japan to take measures into their own hands.  This demonstrates that not only was Reagan not a protectionist, but that he actively sought alternative means to the US imposing protectionist policies. Japan’s voluntary reduction in automobile exports should be considered a success precisely because it prevented disastrous protectionist policies from going into effect, not because it was protectionist. 

One might argue that Reagan was strong-arming Japan into reducing their exports by pointing out that something worse would happen if Japan did not agree to limit their auto exports and that this is tantamount to “pursuing protectionism.”  This is a revisionist version of history, carefully crafted to support an agenda.  Reagan understood that choice is necessarily between actual options, not imagined ones. By preventing Congress from passing a protectionist import quota, Reagan deliberately chose the least protectionist option of the actual options available to him, as David Henderson — a member of Reagan’s Council of Economic Advisors — notes.

Reagan vs. Trump

This stands in stark contrast to President Trump’s approach, which is to actively seek increasing protectionism.  Where Reagan inherited a struggling economy facing high inflation, rising interest rates, falling output, and weak job prospects, President Trump inherited an economy that was experiencing none of that.  While there is a case to be made that the economy had been overheated by excessive government during the previous Administration, there were very few signs of anything in the private sector in need of massive correction in terms of macroeconomic policy.

Despite this, however, President Trump used the The International Emergency Economic Powers Act to formally become “Tariff Man,” ushering in a new era of American protectionism the likes of which we have not seen since the infamous (and disastrous) Smoot-Hawley tariffs.

The comparisons between Trump’s actions and Reagan’s belie a clear agenda: to try to borrow the well-deserved positive legacy of one of America’s most cherished presidents to bolster support for Trump’s disastrous trade policies.  Reagan was no protectionist. But unlike so many, he could see the forest for the trees and knew that protectionism was very likely coming. Rather than stand idly by, he did what he did best: promoted free trade as best he could in the face of options that he actually faced.

After slight deflation in March, prices rose again in April. The Bureau of Labor Statistics (BLS) reports that the Consumer Price Index (CPI) increased 0.2 percent last month. Over the past year, it rose 2.3 percent. “The April change was the smallest 12-month increase in the all items index since February 2021,” BLS notes. This is welcome news for those of us hoping for continued disinflation.

Shelter prices increased 0.3 percent last month, “accounting for more than half of the all items monthly increase.” That’s because shelter makes up a large part of the CPI—nearly a third of the index, approximating its share in the average household’s budget. Also, energy prices increased sharply. They’re up 0.7 percent on the month, driven primarily by natural gas and electricity. There’s likely a significant seasonality component here.

Core CPI, which excludes volatile food and energy prices, rose 0.2 percent last month and 2.8 percent last year. This is the slowest it has grown since March 2021. Again, this is evidence of persistent disinflation.

The Federal Open Market Committee (FOMC) recently decided to keep the target for the Fed funds rate range unchanged. It’s still 4.25 to 4.50 percent. Adjusting for inflation using the twelve-month headline CPI figure yields a real fed funds target range of 1.95 to 2.20 percent. Alternatively, adjusting for inflation using the annualized three-month headline CPI figure of 1.6 percent yields a real fed funds target range of 2.65 to 2.90 percent.

Let’s consult the Fed’s estimates for the natural rate of interest to see whether current market rates represent appropriate monetary policy. The New York Fed puts the natural rate of interest between 0.80 and 1.31 percent in 2024:Q3. The Richmond Fed lists a much larger range: 1.15 to 2.61 percent, with a median of 1.86 percent. The real federal funds rate target range is above the New York Fed’s estimates and the Richmond Fed’s median estimates, regardless of whether the twelve-month or three-month CPI measure is used. The real federal funds rate target range constructed from the twelve-month CPI measure is below the upper end of the range offered by the Richmond Fed, while the range constructed from the three-month CPI measure exceeds it. Taken together, the interest rate evidence suggests monetary policy is somewhere between neutral and tight.

We should also consult monetary data, comparing money supply growth to money demand growth. The M2 money supply is up 4.18 percent over the past year. Broader liquidity-weighted measures are rising between 3.41 and 3.51 percent per year. On the other side of the market, we have money demand, which we can proxy by adding US population growth to real GDP growth. Population growth is about 1 percent, whereas real GDP growth is about 2.05 percent. Hence money demand is growing roughly 3.05 percent per year. All measures of the money supply are rising faster than this, suggesting loose money. This is an interesting divergence from the picture we get from interest rate data.

The discrepancy comes down to a statistical quirk. Although real GDP is still growing on an annualized basis, it actually shrank a bit in 2025:Q1. The reason was a temporary surge in imports, as households and businesses tried to get ahead of impending tariffs. 

But this doesn’t actually mean the US economy is poorer. Domestic spending on consumption and investment remained strong. Some spending was temporarily diverted to foreign production rather than domestic production, in anticipation of tariff-induced price hikes. A single quarter’s decline in measured production isn’t a reliable indicator of a coming recession. 

Especially when it comes to categorizing imports, we should be careful not to confuse accounting conventions for economic analysis. Furthermore, many analysts predict a return to growth next quarter. The Wall Street Journal’s forecasting average is 0.8 percent growth in 2025:Q2. Money demand is likely growing more rapidly than we think. The money supply is probably increasing as fast as it ought to.

The FOMC was right to keep rates where they are. Monetary policy is probably slightly tighter than neutral, which is where we want it to foster broad-based disinflation without damaging the economy. As always, we need to pay attention to future data releases, especially the Fed’s preferred price index, called the Personal Consumption Expenditures Price Index (PCEPI). But policy looks approximately correct for now. Given the Fed’s monumental errors in recent years, we should be grateful it’s getting up to speed.

The Everyday Price Index (EPI) rose to 293.8 in April 2025 on the heels of an 0.34 percent gain. This marks the fifth monthly increase in a row for AIER’s proprietary inflation measure. 

Among the twenty-four constituents of the EPI, 12 rose in price from March to April, two were unchanged, and nine declined. The three categories seeing the largest price increases were motor fuel (one of the largest decliners last month), admission to movies, theaters, and concerts, and nonprescription drugs. Internet services and electronic information providers, purchase, subscription, and rental of video, and fees for lessons and instructions prices showed the biggest declines. 

AIER Everyday Price Index vs. US Consumer Price Index (NSA, 1987 = 100)

Chart

(Source: Bloomberg Finance, LP)

Also on May 13, 2025, the US Bureau of Labor Statistics (BLS) released its April 2025 Consumer Price Index (CPI) data. Both the month-to-month headline CPI and core month-to-month CPI number increased by 0.2 percent, less than the 0.3 percent increase forecast for both.

April 2025 US CPI headline & core month-over-month (2015 – present)

Month-to-month headline inflation in April reflected mixed monthly pressures. The energy index rose 0.7 percent, reversing March’s 2.4 percent decline. This was driven by a 3.7 percent jump in natural gas and a 0.8 percent increase in electricity, while gasoline fell 0.1 percent (though it rose 2.9 percent before seasonal adjustment). The food index declined 0.1 percent, led by a 0.4 percent drop in food at home, the sharpest since September 2020. Major grocery categories declined, including eggs down 12.7 percent, meats, poultry, fish, and eggs down 1.6 percent, fruits and vegetables down 0.4 percent, cereals and bakery products down 0.5 percent, and dairy down 0.2 percent, while nonalcoholic beverages rose 0.7 percent. Food away from home increased 0.4 percent, with full service meals up 0.6 percent and limited service meals up 0.3 percent.

Core inflation, which excludes food and energy, rose 0.2 percent in April, following a 0.1 percent increase in March. Shelter costs rose 0.3 percent, with owners’ equivalent rent up 0.4 percent and rent of primary residence up 0.3 percent, while lodging away from home slipped 0.1 percent. Household furnishings and operations jumped 1.0 percent, and motor vehicle insurance rose 0.6 percent. Education and personal care each edged up 0.1 percent. Offsetting some of these gains, airline fares dropped 2.8 percent, extending a steep decline from March, and used cars and trucks fell 0.5 percent. Indexes for communication and apparel also declined, while new vehicles and recreation were flat. Medical care rose 0.5 percent, including hospital services up 0.6 percent, physicians’ services up 0.3 percent, and prescription drugs up 0.4 percent.

From April 2024 to April 2025 the headline index rose 2.4 percent, lower than surveyed expectations of a 2.3 percent rise.

April 2025 US CPI headline & core year-over-year (2015 – present)

Over the past 12 months, headline inflation reflected diverging trends in food and energy. The food at home index rose 2.0 percent, led by a 7.0 percent increase in meats, poultry, fish, and eggs, with eggs alone up 49.3 percent. Nonalcoholic beverages rose 3.2 percent, dairy products increased 1.6 percent, and other food at home edged up 0.7 percent, while cereals and bakery products were flat and fruits and vegetables declined 0.9 percent. Food away from home climbed 3.9 percent, with full service meals up 4.3 percent and limited service meals up 3.4 percent. Meanwhile, the energy index declined 3.7 percent, driven by sharp drops in gasoline (down 11.8 percent) and fuel oil (down 9.6 percent), partially offset by increases in natural gas (up 15.7 percent) and electricity (up 3.6 percent).

Core inflation (all items less food and energy) rose 2.8 percent over the 12 months ending in April, matching the prior month’s pace and remaining well above the headline rate of 2.3 percent, which marked the smallest annual gain since February 2021. Shelter costs increased 4.0 percent year over year, continuing to exert strong upward pressure. Other notable annual core gains included motor vehicle insurance up 6.4 percent, education up 3.8 percent, medical care up 2.7 percent, and recreation up 1.6 percent. The broader food index rose 2.8 percent, while energy declined 3.7 percent, helping to moderate overall inflation.

The April 2025 CPI data revealed a modest increase in inflation. While it reveals a slight acceleration from March’s subdued figures, overall inflation pressures remain relatively contained. Price gains in tariff-sensitive goods such as furniture, appliances, and electronics, probably reflecting some pass-through from President Trump’s “Liberation Day” tariff hikes, were partially offset by softness in categories like new and used vehicles and apparel. Of particular note, services inflation remained restrained due to ongoing disinflation in leisure-related categories such as lodging and airfares, both of which posted monthly declines. Shelter costs, however, continued to climb steadily and remain a central driver of core inflation.

The evolving effects of tariffs are becoming more visible in the goods sector. After several months of deflation in China-heavy import categories, April showed early signs of a pricing rebound, with some goods shifting from negative to modestly positive monthly inflation. Still, the overall pass-through remains limited as many importers are either absorbing higher input costs or continuing to draw from pre-tariff inventories. Disinflation was slightly more pervasive in April, with nearly 40 percent of core CPI components experiencing monthly price declines. The spread of categories showing annualized inflation above 4 percent ticked up slightly, but those in the 2–4 percent range edged lower, underscoring the uneven nature of current inflation dynamics.

Despite the mild upside in both headline and core inflation, financial markets interpreted the report as broadly benign. Treasury yields dipped briefly but retraced, and rate cut expectations remain priced in for later this year. While April’s data showed more tariff-related inflation pressure than previous months, it was counterbalanced by deflation in key services. Looking ahead and barring any considerable rollback in tariff policies, a lagged increase in core goods prices is likely as older inventories are exhausted; but whether that materializes into broader inflationary momentum remains uncertain. For now, the Fed is data focused and maintaining flexibility in its policy stance.

In its first hundred days, the second Trump administration has been anything but usual by presidential standards. From trade wars to an assault on the federal bureaucracy, Trump and his team have swiftly reshaped the landscape of government action. Amid the torrent of daily news, some critical policy discussions have been swiftly overlooked.

One such overlooked comment came from Commerce Secretary Howard Lutnick who argued in an interview that the official GDP measure should exclude government spending. Economists immediately pointed to the dangers of trying to replace such a widely used economic statistic. However, as we argue in a forthcoming article in the Review of Austrian Economics, there is a case for complementing the existing statistic with alternative measures that exclude at least some components of government spending. After all, it is true that government spending can distort our understanding of economic well-being — a concern that deserves serious consideration. So much so that it alters key facts of American economic history.

The commonly known GDP statistic is a simple sum: consumption spending, investment spending, government spending, and net exports (which is spending by foreigners). Government spending in this equation captures government activity such as the hiring of people to work in a new government office or the purchase of uniforms for soldiers.

This somewhat clashes with the formal definition of GDP: the market value of final goods and services. This reveals a conceptual problem as many government goods and services, such as military equipment and bureaucratic administration, aren’t sold in competitive markets. Without genuine market prices, their value is approximated by government spending costs. But the cost says nothing about “value.” After all, the government could hire a million persons to dig holes and fill them back up. No value is created but costs are incurred.

Historically, even Nobel-winning Simon Kuznets, who pioneered national income accounting, expressed major concerns about this issue. He suggested instead that such expenditures might be better understood as intermediate goods, already accounted for in private-sector production. Another Nobel laureate, James Buchanan, argued for something similar.

Such lines of reasoning influenced more radical economists like Murray Rothbard, who proposed entirely removing government expenditures from GDP. Rothbard’s “Private Product Remaining,” for example, excludes government spending and taxation entirely.

While most economists view this approach as overly extreme, there is an easy “midway” consensual measure we can construct.  Following economic historians Robert Higgs, Lowell Gallaway and Richard Vedder, we exclude military spending and adjust price indexes during periods of price control.

This is because military expenditures on weapons and war materials do not directly translate into better material living standards for civilians. Defense spending should be excluded from GDP when assessing living standards because military goods — like tanks, bombs, and bullets — do not directly contribute to civilian welfare. They are not consumed by households, nor do they improve the quality of everyday life. Including them inflates measures of prosperity in ways that misrepresent how ordinary people are actually doing. Moreover, a great deal of government expenditures during wars represent coerced production (e.g., drafts, requisitions, seizures, nationalizations) which make it harder to evaluate the value to civilians. Finally, during conflicts, governments impose price controls which hide the true extent of inflation.

Removing the effect of price controls and defense spending, what we dub the Defense-Adjusted National Accounts, provides a clearer picture of civilian living standards uninflated by defense expenditures and artificially suppressed wartime prices.

Of course, these corrections reduce the level of the GDP statistic. But that is not all it does. The corrections produce a new series that alters our understanding of US economic history during various periods. The most obvious, and previously covered by Robert Higgs, is during World War II. The official GDP statistics show an economy growing rapidly, which led many to consider the war effort as key to finally ending the Great Depression. Our corrections, and Higgs’s before ours, clearly show that the economy was declining. That is, for the average consumer things in the US were getting worse, not better, during the war.

In fact, our corrections applied to the entire period from 1790 to today show new key facts. Our corrected GDP series reveals that the first half of the 20th century, rather than showcasing robust growth, emerges as a prolonged period of stagnation interrupted by crises. The economy, which had grown at an exceptional pace from 1865 to 1913, gradually deviated from this path between 1913 and 1950. Many claim that this deviation only occurred during the Great Depression and that it ended during the Thirty Glorious years after. But our corrected series show that America never returned to its exceptional growth path.

Finally, pairing our corrected GDP with historical income distribution (i.e., inequality) data reshapes the narrative of the “Great Leveling” during the mid-twentieth century and particularly during wartime years. The leveling, traditionally celebrated as a period of diminishing inequality, actually coincided with declining living standards for everyone — even the wealthy.

Why does this matter today? Current discussions of economic policy often rely on GDP as the key indicator of economic well-being. Yet many Americans feel a significant disconnect between reported economic statistics and their own experiences — the so-called “vibecession.” By acknowledging that traditional GDP figures might inflate government activity’s real contribution, especially military spending, we can better align statistical measures with genuine economic conditions experienced by everyday citizens.

As policymakers grapple with budget priorities, military spending, and public perceptions of economic health, a more accurate measurement of living standards is essential. Adjusting GDP to focus explicitly on private-sector prosperity clarifies whether government actions genuinely contribute to citizen well-being or merely inflate an imperfect statistical measure.

We don’t advocate replacing standard GDP as it captures an approximation of the true statement that not all government expenditures are without value. However, adopting a Defense-Adjusted National Accounts measure can help provide another approximation of a true statement: that wars do not improve living standards. These two approximations together help provide a smaller window for uncertainty. This can help bridge the gap between official economic data and the perceptions of the American public.

Campaigning for a second term, President Donald Trump committed the United States to sweeping tariffs that have no precedent since the Second World War. Shortly after his inauguration, Trump issued multiple Executive Orders (EOs) and press releases both to enact and sometimes reverse tariffs. Anticipation, enactment and then pauses in the president’s tariff agenda all affected US and global equity markets. This essay reports on the market impact of Trump’s multiple tariff decisions. 

Table 1 summarizes values, as of April 30, 2025, for several US and foreign equity markets. It also reports our calculations of daily positive and negative market value changes resulting from Trump’s tariff decisions between election day (November 5, 2024) and April 30, 2025. The daily events are summarized in table 2 below. Cumulative changes at the foot of table 1 represent the summation of negative and positive daily changes following tariff event days, not total market changes between November 5, 2024, and April 30, 2025.

The cumulative negative impact of decisions imposing tariffs subtracted $377 billion from the market value of the Russell 2000, $2 trillion from the Magnificent Seven, $4.7 trillion from the S&P 500 (which includes the Magnificent Seven), and $2.2 trillion from the market value of equities in six seriously affected foreign countries.  

Market losses were sharply reversed when Trump paused pending tariffs on April 9, 2025. Excluding the rebound following the April 9 pause, the negative daily changes far exceeded the positive daily changes.  oreover, US shares were by far the biggest loser from Trump’s tariffs, especially the Magnificent Seven.

Table 1. Daily market capitalization changes between November 4, 2024, and April 30, 2025. $ billion.

Notes: For each country, the following indexes represent the respective equity markets: Mexico (S&P/BMV IPC, ticker: MEXBOL), Canada (S&P/TSX Composite, ticker: SPTSX), China (CSI 300, ticker: CSI300), Europe (STOXX Europe 600, ticker: STOXX600), Japan (Tokyo Stock Price Index, ticker: TOPIX), Korea (Korea Composite Stock Price Index, ticker: KOSPI). Cumulative one-day impact is the sum of daily changes following tariff events. Since the February 1 announcement was on a weekend, February 3 was used as an approximation. For China, February 5, 2025, was the first trading day of the month due to national holidays and was thus used to approximate the reaction to the tariff announcement on February 1 (*).

US Equity Market Reactions

Figure 1 depicts US equity markets for two quite different share categories – the Russell 2000 and the Magnificent Seven – beginning with the general election on November 5, 2024, and ending on April 30, 2025. The Russell 2000 index includes approximately 2,000 small-cap US equities, firms with limited exposure to foreign trade or investment. By contrast, the Magnificent Seven are highly successful tech firms deeply engaged in world markets, both through trade and investment: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.

As figure 1 shows, the Russell 2000 index rallied after Trump’s election, but then lost most of those gains by inauguration day. The Magnificent Seven, however, enjoyed a stronger and more durable rally, gaining about 20 percent between election and inauguration. Evidently, investors believed that Trump’s policies would be highly favorable, at least for large tech firms.

On inauguration day and in the following weeks, Trump issued multiple Executive Orders (EOs) decreeing far higher and more comprehensive tariffs than markets had anticipated. Gloomy prospects of domestic inflation, foreign retaliation, and business chaos shocked the financial markets. Both the Russell 2000 and the Magnificent Seven indexes fell sharply until Trump announced a dramatic tariff pause on April 9, 2025.

Figure 1.  Russell 2000 and Magnificent Seven market indexes.

Notes: Each index is normalized to 100 based on its own value on November 4, 2024. This allows for a direct comparison of relative performance over time.

Digging deeper, we explore equity market valuation changes immediately following each Trump tariff announcement. For this exercise, we examine the change in market prices between the close on the previous day and the close on the announcement day. But for “reciprocal” tariffs that were announced after the market closed on April 2, 2025, we examine the change between the close on April 2, 2025, and the close on April 3, 2025. 

Invoking the efficient market hypothesis, we assume that the expected effects of an announced tariff change on corporate earnings, interest rates and other factors are quickly reflected in equity valuations. Initial expectations may prove too pessimistic or too optimistic. The efficient market hypothesis, however, asserts that immediate expectations as to the price effects of a shock provide the best available forecast on that day. Further, by attributing all valuation changes on the announcement dates to tariff changes, we assume that other contemporaneous shocks were generally minor.

Table 2 lists the dates and summarizes the content of Trump’s tariff announcements, starting with his election on November 5, 2024. Election day is included because market participants then knew that major tariff changes were a near certainty. Trump’s inauguration day, January 20, 2025, was also included because that marked the beginning of specific tariff decisions. Table 2 further shows the percentage change on each valuation day of an ETF for the Russell 2000 (IWM) and the Bloomberg index (BM7P) for the Magnificent Seven. The daily percentage changes in table 2 provide the basis for calculating the daily dollar changes in table 1.

On most valuation days, the Russell 2000 and Magnificent Seven share the same direction of change and roughly similar magnitudes. For example, following the “reciprocal” tariff announcement on April 2, 2025, the Russell 2000 dropped 6.3 percent, while the Magnificent dropped 6.7 percent 

At the foot of table 2, the first row summarizes cumulative negative market reactions recorded on valuation days, expressed in percentage terms. Perhaps surprising, the Russell 2000 index dropped almost as much as the Magnificent Seven. 

The second row at the foot of table 2 summarizes cumulative positive market reactions recorded on valuation days, expressed in percentage terms. In total, positive market reactions exceeded negative market reactions, thanks to the huge relief rally when Trump paused tariffs on April 9, 2025.

The third row at the foot of table 2 summarizes cumulative positive reactions in percentage terms, apart from the April 9 relief surge. Evidently, without the tariff pause, the Russell 2000 index and the Magnificent Seven would both have been deeply in the red at the end of April 2025.

Table 2. One-day price returns of Russell 2000 and Magnificent Seven on Trump announcement days. Daily percent changes.

Evaluation Day	Event	Russell 2000, 1-day returns (%)	Magnificent Seven, 1-day returns (%)
11/5/2024	Election Day	1.9	1.8
1/21/2025	Inauguration Day (Jan 20, 2025)	1.8	0.3
2/3/2025	On February 1, Trump issued EO announcing tariffs on Canada, Mexico, and China.	-1.3	-1.7
2/10/2025	Trump announced 25 percent import tariffs on steel and separate proclamation imposing 25 percent tariffs on aluminum as of March 12.	0.4	0.4
3/4/2025	EOs to raise the new tariffs on all imports from China from 10 percent to 20 percent, impose 10 percent tariffs on imports of Canadian oil and energy products and 25 percent tariffs on the remainder of imports from Canada.	-1.1	-0.6
3/25/2025	The White House issued secondary tariffs on third countries importing Venezuelan oil.	-0.7	1.2
3/26/2025	The White House imposed 25 percent tariffs on automobiles and certain automobile parts.	-1.0	-3.0
4/3/2025	On April 2, the White House invoked IEEPA to impose baseline 10 percent tariff starting April 5 and then “reciprocal” tariffs starting April 9.	-6.6	-6.7
4/8/2025	The White House amended to impose additional 50 percent tariff on imports from China, increasing to 84 percent.	-2.7	-2.4
4/9/2025	The US imposed an additional country-specific tariff on China; then paused other “reciprocal” tariffs for 90 days, except for China. China will now face 125 percent of tariffs.	8.7	14.4
4/11/2025	The White House issued a list of products, including smartphones and semiconductors, to be excluded from the April 2 executive order	1.6	1.9
4/29/2025	The White House issued a proclamation and an executive order to address concerns over stacking tariffs and avoiding the cumulative tariffs. The proclamation also amended previous tariffs under Section 232 regarding automobiles and automobile parts.	0.6	0.6
Cumulative one-day loss (%)		(13.4)	(14.4)
Cumulative one-day gains (%)		14.9	20.6
Cumulative one-day gains (%), without April 9		6.2	6.2

Source: Bloomberg and authors’ calculations. Bown, Chad P, “Trump’s Trade War Timeline 2.0: An Up-to-Date Guide.” 

Notes: One-day price returns are calculated by the percentage change between the closing price on the announcement day and the closing price on the previous trading day. 

The equity market surge, following the tariff pause on April 9, 2025, was a game-changer, not only for the markets but also for Trump’s political fortunes. According to press reports, Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent sold Trump on the pause, overshadowing tariff hawk Peter Navarro.

If that account is accurate, Lutnick and Bessent gave Trump good advice. Without the pause, equity market losses for the six months between November 2024 to April 2025 would have overwhelmed equity market gains.

Foreign Equity Market Reactions

Figure 2 compares the S&P 500 index with indexes of exchange-traded funds (ETFs) for six affected countries. Between election and inauguration, the S&P 500 rallied about 6 percent, while most of the country ETFs fell to varying extents.

Within weeks after inauguration, as the breadth and extent of Trump’s tariffs were revealed, most markets fell. Of course, US tariffs were not the only shock moving markets. Notably, Chinese equities rose in response to government stimulus. Trump’s sweeping “Liberation Day” tariffs on April 2, however, provoked a slump in all markets, reversed to varying degrees by the April 9, 2025, 90-day pause.

Figure 2. S&P 500 and Foreign Market Indexes.

Notes: Each index is normalized to 100 based on its own value on November 4, 2024. This allows for a direct comparison of relative performance over time.

Table 3 shows the percentage change on each valuation day for the S&P 500 ETF (SPY) and ETFs for six heavily affected countries: Mexico (EWW), Canada (EWC), China (FXI), South Korea (EWY), Japan (EWJ) and the European Union (JGK). The first three are the top US trading partners. All six have large bilateral surpluses in their merchandise trade with the US, resulting in high (but falsely named) “reciprocal” tariffs. All ETFs are traded in New York, ensuring that valuation changes occur during the same time period. 

At the foot of Table 3 the first row shows cumulative negative losses between November 5, 2024, and April 30, 2025, expressed in percentage terms; the second row shows cumulative positive gains in percentage terms; and the third row shows cumulative positive gains, apart from the surge on April 9, 2025, again in percentage terms.

In percentage terms, the S&P 500 experienced the biggest cumulative losses from Trump’s negative tariff announcements, though Canada and South Korea were close. China and Europe were least affected. Trump’s tariffs dealt a heavier blow to US equity values than to the supposed targets, especially China.

Moreover, foreign equity markets generally enjoyed equal or larger cumulative gains than the S&P 500 from Trump’s positive tariff announcements. Foreign one-day gains, apart from the April 9 surge, exceeded the S&P 500 gains. Worth noting is that cumulative S&P 500 losses, apart from the April 9 relief rally, were almost twice as large as gains. If President Trump wants US equity market to prosper, he should pause more tariffs. 

Table 3. One-day price returns of selected ETFs on Trump announcement days. Daily percent changes.

Evaluation Day	S&P500	EWC (Canada)	EWW (Mexico)	FXI (China)	EWJ (Japan)	EWY (South Korea)	VGK (Europe)
11/5/2024	1.2	1.1	-0.1	2.4	1.5	0.4	0.7
1/21/2025	0.9	1.7	1.9	1.1	1.7	1.6	2.3
2/3/2025	-0.8	-1.6	2.5	-0.5	-1.0	-1.1	-1.5
2/10/2025	0.7	0.9	0.2	2.7	0.4	1.8	0.7
3/4/2025	-1.2	-1.7	0.3	1.5	-0.8	0.5	0.2
3/25/2025	0.2	0.5	1.1	-1.0	0.7	-0.4	0.6
3/26/2025	-1.1	-0.8	-1.1	-0.1	-1.3	-0.5	-1.4
4/3/2025	-4.8	-2.3	4.0	-0.9	-4.1	-2.7	-1.4
4/8/2025	-1.6	-1.6	-0.9	-1.4	0.5	-3.7	-0.4
4/9/2025	9.5	6.4	7.9	7.1	7.6	8.9	7.4
4/11/2025	1.8	2.9	0.8	4.4	2.5	4.8	2.7
4/29/2025	0.6	0.2	-2.9	-0.6	0.4	0.8	0.2
Cumulative one-day losses (%)	(9.5)	(8.0)	(5.1)	(4.5)	(7.2)	(8.4)	(4.7)
Cumulative one-day gains (%)	14.8	13.7	18.6	19.2	15.4	18.7	14.8
Cumulative one-day gains (%), without April 9	5.3	7.3	10.7	12.2	7.8	9.8	7.4

Source: Bloomberg and authors’ calculations. 

Notes: One-day price returns are calculated by the percentage change between the last price of the evaluation day and the previous trading day. If an announcement is made on a non-trading day, the evaluation will be based on the nearest trading day.