Articles by John Carney

Business

Breitbart Business Digest: The Real Reason Tariffs Lower Inflation

How Tariffs Lower Inflation Without Hurting the Economy The San Francisco Federal Reserve’s paper on tariffs leaves us with a puzzle: why do tariffs affect the economy in such a counterintuitive way? Looking at 150 years of data, the researchers at the San Francisco Fed found that tariff hikes are followed by lower inflation and higher unemployment. That runs contrary to the widespread assumption that tariffs might result in higher levels of employment but at the cost of higher inflation. The authors of the paper say they think this might be a demand-destruction story: tariffs scare investors, tighten financial conditions, and reduce aggregate demand. They point to two possible channels: increased uncertainty about economic policy and declining asset prices. In either case, they think the result would be less investment and spending, resulting in fewer jobs and lower prices. It’s a plausible interpretation. But there’s another one that fits the San Francisco Fed’s results even better—and better explains the actual policy mix Trump is deploying. It starts with a simple observation: the American economy, particularly in tradable sectors, has spent decades locked into a low-wage, low-productivity equilibrium. But this is not the only—and certainly not the best—way to run the economy. The Path Toward Low Wage, Low Productivity America With tariffs low and borders open, domestic firms faced a relentless downward pressure on price and costs. Foreign competitors offered rock-bottom costs. The easiest way to compete was obvious: keep wages down, skimp on capital investment, and hire lots of low-skill workers. Call it the low-wage equilibrium. Wages stay depressed. Productivity per worker stagnates. Employment is high in raw numbers, but the jobs are often unstable and poorly paid. This, in essence, is what “competing with China” meant in policy debates: we imported the low-wage production model directly into our own labor market. Now imagine what broad tariffs actually do to that setup. The Structural Shift Toward Higher American Productivity When you impose a general tariff increase—not a carve-out for one industry, but a comprehensive one—three things change simultaneously. First, foreign cost pressure eases. Domestic firms no longer need to match China’s price to survive. The brutal race to the bottom on wages becomes less binding. Second, workers’ bargaining power rises. Employers can no longer credibly threaten to source overseas. More importantly, the political act of raising tariffs sends a signal: the full faith and credit of the American people is backing domestic production. That shifts leverage in wage negotiations across the entire tradable sector and, because workers can move between sectors, spills into services as well. Third, cheap labor becomes relatively expensive compared to capital. With the wage floor rising and the supply of low-skilled workers finite, the “just hire more bodies” model stops making economic sense. The alternative path of investing in machines, reorganizing production, training workers, and deploying better logistics suddenly looks far more attractive. Add in the rest of the policy package—restricted low-skill immigration shrinking the inflow of wage-depressing workers, immediate expensing and lower taxes on capital, and pressure for lower interest rates—and the choice becomes obvious. Firms stop trying to run domestic sweatshops and start buying capital and raising productivity. In this supply-side interpretation, tariffs don’t primarily crush aggregate demand. They fundamentally change how we produce. Firms shift from many low-productivity workers with minimal capital and minimal wages to fewer workers with more capital per person, higher productivity, and higher wages. The implication is stark: some jobs disappear—specifically, the worst jobs at the bottom of the productivity ladder. The remaining jobs are more productive and better compensated. Output doesn’t collapse; it may even rise. But you need fewer workers once you’ve upgraded the capital stock and reorganized processes. This alone generates higher measured unemployment, even if total output is rising. Some of the low-skill, low-productivity jobs go away and some people get trapped in the transition. But this is likely a temporary phenomenon. As the economy shifts toward rewarding investing in higher productivity and domestic manufacturing, the workforce will shift along with it, bringing back in workers. So, the unemployment effect in the San Francisco Fed paper is exactly what you’d expect from a structural shift away from unproductive jobs, not from a generic demand collapse. Why Prices Fall Now comes the trickier part: squaring tariffs with disinflation. The standard objection is that tariffs raise costs and therefore should raise prices. Yet the San Francisco Fed finds the opposite over the long arc of history. How do we resolve this? The key is unit labor cost—the wage expense required to produce one unit of output. It’s a simple formula: wage per worker divided by output per worker. Tariffs combined with Trump-style policy push on both sides of that equation simultaneously. Wages rise because workers gain bargaining power inside the tariff wall and reduced low-skill immigration tightens the labor market from below. Productivity rises because firms respond to higher wage pressure and cheap capital by investing in machines, training, and software. Output per worker climbs. Here’s the critical insight: if productivity rises more than wages, unit labor costs actually fall. Even though workers earn more per hour, each unit of output becomes cheaper to produce. In competitive or semi-competitive markets, firms can’t sit on lower unit costs indefinitely. Those savings show up as either lower prices than the old models predict or much weaker pass-through of tariffs into consumer prices. That’s very likely why the San Francisco Fed finds disinflation rather than inflation after tariff hikes. You haven’t just destroyed demand. You’ve moved the entire supply side from low-productivity to high-productivity. Costs per unit are lower even though wages are higher. In short, the mechanism works like this: tariff shock plus fewer low-skill workers plus cheaper capital produces capital deepening and higher productivity, which lowers unit costs, which generates disinflation, not inflation. Two Stories, One Data Set This matters because both interpretations can fit the San Francisco Fed’s impulse responses. You can describe the same results in two languages: In the demand-destruction story, tariffs frighten investors, hurt confidence, and tighten credit. Households and firms cut spending. Lower demand produces higher unemployment and lower inflation. In the supply-side story, tariffs, immigration limits, capital tax cuts, and pressure for lower rates combine to make low-wage, low-productivity production uneconomical. Firms invest in capital and reorganize. Low-productivity jobs disappear while high-productivity jobs grow. The transition produces temporary unemployment, but the new supply side has higher real wages and lower unit costs. The question is which story better matches the policy mix we actually see and better accords with long-run outcomes. Trump’s program pairs tariffs with immigration restrictions, capital incentives, and monetary easing. The long-term political economy shows the country has shed bad jobs while raising real wages for workers who remain. On both counts, the supply-side story wins. That doesn’t mean every imaginable tariff is justified—we probably should not have tariffed coffee or bananas—or that current levels are optimal. Maybe tariffs should be set a bit higher given our still too-high level of inflation. It means the San Francisco Fed’s paper shouldn’t be read as evidence that tariffs work only by beating demand over the head. It should be read as evidence that tariffs, paired with immigration policy, capital policy, and monetary policy, are tools for breaking a low-wage equilibrium and pushing the economy toward more capital, more productivity, higher real wages, and a cooler price path.

7 hours ago

Technology

The 'Downwardly mobile' who feel betrayed by middle-class dreams flocked to Mamdani

Zohran Mamdani, a self-described democratic socialist, has been elected mayor of New York City. More than one million New Yorkers — 50.4% of the electorate — cast their ballots for a guy who promises government-run grocery stores, free buses, a rent-freeze, diminishing the role of police in fighting crime, higher taxes on the wealthy and a vastly expanded government sector. Some of his best numbers came from the gentrified or gentrifying neighborhoods of Brooklyn. Prospect Heights, East Williamsburg and Bushwick gave him more than 80% of their votes. These areas are now associated more with oat-milk lattes than organized labor. That’s led many conservatives to scoff at the idea that Mamdani represents a working-class insurgency. Far from being a tribune of the downtrodden, we’re told, he’s simply channeling the performative rage of the privileged: over-credentialed, under-showered and long on theory but short on gratitude. There’s something to this. Mamdani is a self-described socialist. He really does want to freeze rents in rent-stabilized apartments and introduce government-run grocery stores. He thinks the police can be replaced with social workers. But that reaction misses something important. The Park Slope-Bushwick Mamdani supporters are not, in any meaningful sense, working-class. But they are not exactly elite either. They belong to a group that has become increasingly central to American politics: the downwardly mobile professionals, the overproduced graduates of our university system, raised to expect middle-class stability and discovering instead that the system has little to offer beyond high rent and burnout. Their rage is real, and if the right wants to be serious about building a majoritarian coalition around economic renewal, it ought to start by understanding that rage, not mocking it. These voters are not clamoring for socialism out of youthful rebellion. They’re reacting to a broken bargain. They grew up being told that education was the path to a stable, meaningful life. Instead, they’ve entered a labor market that treats professional work as disposable, housing as a luxury good and children as a financial impossibility. Many have good salaries by national standards — $80,000, even $120,000 — but in New York City that can still mean roommates, debt and no hope of buying a home. They’re too rich to be poor and too poor to feel secure. I lived in Park Slope from 2008 to 2020, most of that time in a fourth-story walk-up apartment with my wife and our two daughters. We had about 1,200 square feet. I know the neighborhood, and I know the people Mamdani represents. These are not revolutionaries and they are not committed socialists. At one point in the not so distant past, their class equivalents would largely have identified as Republicans. They are parents, renters, freelancers, teachers, social workers, policy analysts and junior lawyers trying to make life work in a city where everything is getting more expensive and nothing feels stable. The neighborhoods where Mamdani won aren’t the working-class strongholds of the 20th century. They’re something newer, stranger: enclaves of educated precarity. These are not blue-collar districts where people punch clocks and belong to unions. They’re zones of post-industrial drift, populated by nonprofit managers, freelance writers, overburdened teachers and software engineers who live paycheck to paycheck despite six-figure incomes. This is a class increasingly defined by contradiction: culturally elite, economically unstable, and structurally blocked from mobility. They are renters in every sense — of housing, of jobs, of status. What they see in politics is not a chance to remake society in the image of Marx, but a last-ditch effort to recover the future they were promised. Housing is the most obvious pressure point. According to the real-estate-analytics firm Zumper, the annual median rent for two-bedroom apartments in New York City increased 15.8% to $5,500 over the past year alone. In Brooklyn, the median rent for a two bedroom is $4,645. That means a household earning $150,000 a year — comfortably in the national top 10% — can still be paying well over 30% of its income just on rent. What used to feel like a path toward stability — education, professional work, a modest home — has become a monthly scramble to keep a roof overhead while saving nothing. A survey of New Yorkers conducted by the Manhattan Institute in June found that housing costs were cited as the most important issue by one-quarter of likely voters, just behind the 26% who said crime and public safety were their top issue. Jobs, taxes and the economy came in a distant third at 18%. This is not just about cost. It’s about trajectory. Homeownership was once the bridge between generational struggle and middle-class stability. It turned work into wealth and rooted families in communities. Now that bridge is washed out. For Mamdani’s voters, the idea of buying a home feels like a taunt. They followed the script, but the rewards are gone. Education, the other great pillar of middle-class ambition, has become just as unstable. The rewards of a college degree have become much thinner. A team of St. Louis Federal Reserve Bank researchers found that while college graduates consistently earn more than high school graduates, the wealth gap between them is shrinking. For younger generations — especially white Americans born in the 1980s — the lifetime wealth advantage of a college degree has nearly disappeared, raising questions about the long-term financial value of higher education. The costs, meanwhile, kept climbing. For younger professionals, student debt is now the price of admission to a labor market that no longer delivers. A generation of Americans has mortgaged its future to chase jobs that don’t pay enough to secure one. And it’s not just the price of education — it’s the competition for what it’s supposed to guarantee. The elite labor market has grown more brutal even as the actual work has grown more hollow. A surprising number of the people who make up Mamdani’s base are doing what David Graeber called “bulls–t jobs” — positions that serve little productive purpose, sustained by inertia, branding or grant money. These aren’t blue-collar jobs lost to China. They’re white-collar jobs lost to abstraction. What Mamdani tapped into wasn’t class war in the old sense. It wasn’t tenant against landlord or worker against boss. It was a revolt of the educated against the system that lied to them. In a kind of mirror image of the alienation felt in the deindustrialized Midwest, gentrified Brooklyn has developed its own sense that something has gone deeply wrong. The implicit promise of potential prosperity — that education and effort would pay off — has been broken. Their professional identities are eroding. Their earning potential has stagnated. And yet they remain dependent on a system they cannot afford to leave. This is the political economy of professional immiseration. It breeds resentment, yes — but also yearning. Not for revolution in the abstract, but for restoration in the concrete. For housing they can afford, transit they don’t have to calculate against grocery costs, a job that makes sense, a city where adulthood still feels possible. As Julius Krein observed in a 2019 article for American Affairs, the real economic divide is not between elites and the working class, but within the elite itself: between those who live on capital and those who live on labor, even elite labor. Professionals who once ran the system now find themselves increasingly at its mercy. It’s easy to dismiss their demands as radical. What’s harder is admitting that what they really want is something conservatives should recognize: a chance to own, to settle, to raise a family, to participate in a community that offers continuity and meaning. These are not fringe values. They are the building blocks of a stable society. There is a cautionary note here for the right. Too often, conservatives talk about economic dislocation only when it affects the industrial or rural working class. They ignore the ways that the credentialed class has also been turned into tenants — of property, of institutions, of their own social position. Mamdani’s base isn’t angry because they’ve lost power. They’re angry because they were never given enough to secure prosperity and a sense of economic security in the first place. A conservative movement serious about the common good ought to see this as a call to action. These voters are not lost to the left by necessity. What Mamdani’s win reveals is not that New York’s professionals have embraced socialism, but that they’ve given up on the institutions that were supposed to work for them. But the elements of that alternative already exist — just not yet in the political imagination. A pro-family housing agenda that addresses the cost of living in urban centers. An industrial policy that creates meaningful white-collar work outside of finance and marketing. A humane vision of education that doesn’t reduce young people to debt-fueled strivers. A broader rethinking of what professional life is for, and how it can serve the nation instead of the asset class. Mamdani is not offering this vision. But he has captured something real. And that should worry anyone who wants American politics to move beyond false choices between NGO progressivism and financialized technocracy. There is a restless class out there — highly credentialed, economically insecure, politically volatile. If conservatives refuse to understand this class — if they retreat to easy dismissals and recycled culture war lines — they will cede this territory by default. But if they engage seriously, with a willingness to acknowledge that the American Dream must be rebuilt, they may find this new class less of a threat and more a political companion. Politics in this country will not be shaped by the capital class alone, nor by the working class in isolation. The people who turned out for Mamdani are the third force — the frustrated professional middle, the overeducated and under-rewarded, the strivers without a staircase. Mamdani’s election is not a tantrum of the privileged. It’s a forecast. Reprinted with permission from Commonplace.

Nov 8, 2025

Technology

Breitbart Business Digest: The Fed's Civil War Over Tariffs, Inflation, and Jobs

The Fed’s Fault Lines: Tariffs, Labor, and the Battle Over the Next Cut Yesterday we explored how the battle over rate cuts has scrambled old alliances inside the Federal Reserve. Today we look closer at what’s driving that split and what it means for markets. The fault lines no longer run neatly between “hawks” and “doves,” or even between Republican and Democratic appointees. Instead, they cut across both camps, forming unlikely coalitions around two questions: Are tariffs creating durable and significant inflation risks? And is the labor market showing hidden weakness or still running strong? These are not academic disputes. They will decide whether the Fed cuts again in December—or whether Powell’s next move is to hit pause. What follows is a look inside this strange new alignment and why even the data itself may not settle the fight. The seven members of the Federal Reserve Board of Governors and 12 Reserve Bank presidents attend the Federal Open Market Committee (FOMC) meeting on October 28, 2025. (Federal Reserve via Flickr) The Strange New Division at the Fed Several forces are shaping these coalitions. First, there’s a fundamental disagreement about the nature of current inflation. The dovish camp believes tariff-driven price increases are temporary and should be ”looked through,” much as central banks traditionally ignore oil price shocks. The hawks see something more persistent—inflation that’s been above target for years and shows worrying signs of becoming entrenched. What’s more, many of the hawks brought with them to the Fed a deeply held belief that tariffs are a destructive economic policy, priming them to embrace interpretations in which import duties raise prices. The inflation data so far appears to favor the dovish interpretation. While headline inflation remains elevated at three percent, the cooling in manufacturing price pressures and the attribution of remaining inflation primarily to tariffs suggests the price increases may indeed prove temporary once supply chains adjust. The consumer price index for core goods is up just 1.5 percent. Exclude used cars, and the core goods index is up just 1.1 percent from a year ago. Durable goods price are up just 1.8 percent. Clothing prices are down a tenth of a percentage point. New cars and trucks are up just 0.8 percent. It’s hard to see a lot of tariff pressure in these prices. Second, Fed officials are reading labor market signals differently. Lisa Cook points to rising unemployment among vulnerable populations—youth and Black workers—and growing financial stress among low- and middle-income households. She calls this a ”two-speed economy” where the affluent thrive while others struggle. Michelle Bowman notes the employment-to-population ratio has dropped significantly, suggesting more weakness than headline unemployment numbers reveal. Manufacturing data lends credence to these concerns. One ISM respondent from the chemical products sector captured the prevailing mood: ”Business continues to remain difficult, as customers are canceling and reducing orders due to uncertainty in the global economic environment and regarding the ever-changing tariff landscape.” The ISM report found that 58 percent of the manufacturing sector’s GDP contracted in October. The hawks counter that labor markets remain near full employment by historical standards. They worry that keeping policy too loose risks reigniting inflation without meaningfully helping employment. What’s more, they can point to an economy that appears to be growing quite rapidly, with the Atlanta Fed’s GDPNow measure currently clocking in a four percent. December’s High-Stakes Meeting The plunging market odds for a December cut reflect genuine uncertainty about which faction will prevail. Just last week, with inflation data cooperating and the October cut widely anticipated, traders were near-certain the Fed would cut again next month. But as soon as the meeting concluded—with Fed Chair Jerome Powell’s cautious language, Jeffrey Schmid’s dissent to hold, and Stephen Miran’s dissent to cut more—that confidence evaporated. The economic data between now and December will be decisive. But we still do not know what economic data will be available due to the government shutdown. This realignment extends beyond monetary policy. It reflects a fundamental shift in how economic policy coalitions are forming across the political spectrum. The old battles between Keynesians and monetarists, between inflation fighters and full employment advocates, are giving way to new fault lines. For now, markets are hedging their bets. At 65 percent, December remains more likely than not to bring another cut. But that’s a far cry from the near-certainty of a week ago. In a central bank as divided as this one, even the most basic near-term policy decisions have become genuinely contested. The incoming data may ultimately vindicate one camp or the other. If inflation continues to moderate while labor markets weaken—as recent manufacturing surveys suggest—the doves will have been proven right. If inflation proves stickier than expected, the hawks’ caution will look prescient. One thing is certain: The December meeting will test whether this divided Fed can navigate between equally unpalatable risks. And unlike past eras, we can no longer predict how officials will vote based on who appointed them. In the new Fed, strange bedfellows make strange monetary policy—and increasingly uncertain outcomes.

Nov 4, 2025

Technology

Breitbart Business Digest: Fact Checking Harvard’s Flawed Tariff Study

How Harvard Researchers Accidentally Doubled the Tariff Effect When Federal Reserve Chair Jerome Powell cited rising import prices as evidence that tariffs are driving inflation, he was almost certainly relying on a new Harvard Business School study. The paper’s headline finding: imported goods prices rose “roughly twice as much” as domestic ones—a 1.8x ratio that suggests tariffs are having a dramatic, differential impact on traded goods. There’s just one problem: that finding depends entirely on two questionable methodological choices that happen to maximize the measured effect. Make equally defensible alternative choices, and the gap shrinks by up to around 40 percent. The study, “Tracking the Short-Run Price Impact of U.S. Tariffs,” comes from a team led by Harvard Business School’s Alberto Cavallo, along with Paola Llamas of Northwestern and Franco Vazquez of Universidad de San Andrés. It’s been making the rounds in Washington, and for good reason—it’s based on novel real-time price data and tackles an urgent policy question. But the paper is flawed in ways that undermine confidence in its findings. The Art of Baseline Selection To measure tariff effects, the researchers need a “pre-tariff trend”—a baseline showing where prices were heading before tariffs. Then they measure the deviation from that trend after tariffs hit. Simple enough. But when does the baseline period start? And when does the “tariff period” begin? The Harvard team made two key choices: start the baseline in October 2024, and treat March 4, 2025 as when tariffs began. Why October? They don’t say. They have data back to January 2024—they show it in their appendix—but they never use it for the main analysis, never explain these choices, and never test whether they matter. So, we ran the tests they skipped, using their publicly available data. We recalculated the pre-tariff trends with different baseline periods and different treatment dates to see how sensitive their findings are to these choices. The paper reports that imported goods rose 5.4 percent relative to pre-tariff trends, while domestic goods rose 3.0 percent—a differential of 2.4 percentage points and a ratio of 1.8 times. That’s the “roughly twice as much” finding that the paper reports. But that finding depends entirely on their specific choices. If we stretch the baseline out so that it begins in January and still runs through March, the gap between imported goods price changes relative to trend and domestic goods falls to 2.1 percentage points, a ratio of 1.6 times. That’s a 14 percent decline in the gap by simply adjusting when the baseline starts. Why does this matter? The researchers had data going back to January but chose to use only October forward. A longer baseline period captures more of the underlying trend, making the post-tariff deviation look smaller. But why treat March 4 as the start of tariffs? The researchers have a defensible argument that this is when major tariffs on China, Mexico, and Canada were announced. A more natural choice would be when Donald Trump won re-election after campaigning on raising tariffs and defeating an opponent who was constantly claiming his tariffs would amount to a “national sales tax.” If retailers are forward-looking—and the Harvard paper itself insists they are, emphasizing how prices responded to “tariff news” and “expected” costs—then expectations should have started affecting prices the moment Trump won. Under this specification, the ratio drops from 1.8 times to 1.4 times—not “roughly twice as much” but “about 40 percent more.” Maybe that’s too early, though. What if we move the tariff date from March to Liberation Day, April 2? That’s when Trump announced a 10 percent baseline tariff on nearly all countries—the big, universal intervention that applied broadly across imports. Use this as your start date, and you’ve reclassified March’s price movements from “tariff effect” to “pre-tariff baseline.” Keeping the earlier January baseline, the absolute difference drops to 1.89 percentage points, a ratio of 1.59 times. Notice the pattern? At every decision point, the researchers made the choice that produces the larger absolute effect and a larger ratio. They chose a late starting baseline period (October instead of January). They chose an early plausible treatment date (March 4 instead of April 2 or November 5). Each choice is individually defensible. Together, they stack up to maximize the measured impact. The Garden of Forking Paths This is what sociologist Andrew Gelman calls the “garden of forking paths.“ Even without fabricating data or engaging in what social scientists call “p-hacking,” a researcher who must decide which time window to use, which variables to include, and which controls to apply, is effectively choosing between statistical worlds. Each choice leads to a different result. The problem isn’t that the researchers made unreasonable choices. It’s that they made every choice in the direction that maximizes their headline finding, without ever testing whether that finding holds up under alternative specifications. They show appendix materials with data going back to January 2024—but frame these as “robustness checks” proving their trends are stable, not as evidence that their main results might be sensitive to baseline choice. Is choosing October over January wrong? Not necessarily. Is March 4 an unreasonable treatment date? You could argue for it. But making every choice in the same direction, without testing sensitivity, while trumpeting a “roughly twice” finding that appears in only one of several plausible specifications? That’s something else. The Black Box The paper also claims tariffs added 0.7 percentage points to overall inflation. Would this finding hold up to the same scrutiny? Unfortunately, we can’t know. The researchers base this estimate on category-level price indices and CPI weights they don’t share. They tell us they weight by “official CPI expenditure shares at the 3-digit COICOP level” and that their sample covers 29.7 percent of the CPI basket. But they don’t report the weights, the category-level contributions, or how these aggregate to 0.7 percentage points. It’s essentially a black box. We know they covered about 30 percent of CPI and that Furnishings (with the highest measured price increase) makes up 54 percent of their products. But we don’t know if Furnishings represents 5 percent or 15 percent of actual CPI weights. Without that information, the 0.7 percentage point claim cannot be verified or replicated. That kind of transparency problem is all the more troubling given the sensitivity of their other findings to seemingly questionable measurement choices. This paper will likely be cited in policy briefings as if it were settled science. But its headline finding—that imports rose “roughly twice as much” as domestic goods—appears in exactly one of several equally plausible specifications. Change the baseline period to use all available data, and “roughly twice” becomes “60 percent more.” Treat Trump’s election as when tariff expectations began affecting prices, and it becomes “40 percent more.” Use Liberation Day as the tariff start date, and the absolute gap shrinks by a fifth. This isn’t about the researchers being dishonest. They’re not. This is a top-tier team doing serious empirical work. But it’s a textbook case of how a researcher’s degrees of freedom—the many small choices that go into any analysis—can produce quotable, policy-relevant findings that don’t hold up under scrutiny. The next time you hear that tariffs made imported goods rise “roughly twice as much” as domestic goods, ask: which baseline? Which treatment date? Because depending on the answer, the effect might be half as large as advertised.

Oct 30, 2025