The Case for Gradual Change
When I was in banking graduate school, the capstone class was the opportunity to run a bank, or at least a computer simulation of a bank. The American Bankers Association School of Banking at that time was mail studies, with two weeks in-person attendance each summer at Rutgers University.
Students made their decisions about interest rates, loans, branches and employees on paper. Those sheets were collected at day’s end and entered into the simulation program. We each received a printout the next day of the results for our bank.
Banks performed best when there was gradual change. Abrupt changes resulted in less satisfactory performance.
The reason I am mentioning this is relevance to the US government. We’ve seen a dizzying number of changes in a short amount of time. Lots of changes create uncertainty, and uncertainty is bad for business.
Auto manufacturing is a complex business and is a good metaphor for the economy. To gain advantage, foreign companies manufacture in the US, US manufacturers make auto parts and manufacture in Canada and Mexico. This business is capital and labor intensive. Rapid change doesn’t mix with long-term capital investment and running a business.
President Trump has his own opinions about what businesses should do and what products they should produce. It would have been better if he met with manufacturers and said, I don’t care what kind of cars you make, I want you to make them in the US. What can we do to help?
China is a leader in electric cars and solar panels. They look forward to stepping into the vacuum that our exit leaves. How do we meet the challenge of China when we exit the field in the middle of the game?
International trade has lots of benefits. Almost forever, goods from one place that have a competitive advantage go to other places that want them. It’s not a bad deal for us to get TVs from China in exchange for our IOUs. Of course, we need to protect some critical industries.
Can we expect inflation? Tariffs make goods more expensive. Tax cuts are inflationary- they tend to put more money into circulation and increase demand for goods and services. Expected reductions in business regulations tend to be deflationary.
I don’t think inflation will be a problem; but a recession will. We’ve had a long period of growth, since 2007. This is longer than most economic cycles, but all things come to an end.
In addition to the uncertainty, layoffs of government workers and reductions in funding for research and other purposes will hurt. Removing the incentives for rapidly growing clean energy businesses takes away potential growth.
This is a big country, so it takes awhile for changes to have an effect. It is like changing course with an ocean liner – it takes a couple of miles to turn, but it will. We should plan for it.
Opportunities do present themselves in recessions. Keep an eye out for those opportunities.
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