You can’t have everything. Where would you put it?
~Comedian Steven Wright
The new economy still plays by the old economy rules.
~Nobel Laureate Economist Paul Romer
Wright was half-right, half wrong. Case in point? At the height of post-COVID inflation, every economist west of the Atlantic coastline predicted the Biden administration faced an inevitable recession and higher unemployment if the Federal Reserve Bank raised interest rates to tamp down inflation. However, unlike Wright’s warning, the American economy got everything it wanted–no recession, lower inflation, unprecedented job growth, record low unemployment, increase in wages, a stock market at all-time highs and rising consumer confidence.
How was the Biden administration able to do this? Two very simple reasons. Policy makers did not get drawn into the false choice between fiscal and monetary methods of juicing the economy. And they had decades of historic date which provided guidance about the purpose and timing of these competing economic theories.
Remember, before Joe Biden took his oath of office, the unemployment rate peaked at 14.8 percent in April 2020. In March 2021, Biden signed the American Rescue Act which provided $1.9 trillion in fiscal stimulus. By the first anniversary of the law’s passage (March 2022), the unemployment rate fell to a historic low of 3.7 percent.
That same month, the Federal Reserve Bank (The Fed) raised interest rates on “federal funds” (the short-term interest rate at which banks lend money to each other overnight to ensure liquidity) from 0.25 to 0.50 percent, the first increase since the beginning of the pandemic in March 2020. The Fed would continue to raise the federal funds rate for the next 16 months to fight the inflationary impact of the stimulus package and disruptions in the supply chain for goods and services, until it reached a high of 5.50 percent in July 2023.
Where did Steven Wright miss the boat? American voters did find a place to put this surprisingly ideal economic environment. OUT OF SIGHT, OUT OF MIND. Thanks in part to poor messaging by the Biden administration. But mostly due to the “glass totally empty” fairy tale shared with sleepwalking Americans nightly on Trump state media. Could the government have brought down inflation more quickly through even higher increases in interest rates or less fiscal stimulus? Of course, but at what cost? That is the point at which we need to heed Paul Romer. The old economic rules would still apply. Such drastic actions would probably have made the economists’ prediction of a recession a self-fulfilling prophecy. Would the MAGA-verse and its media echo chamber be any less critical with a lower inflation rate but more Americans without jobs and income to take advantage of the more stable pricing? I think you know the answer.
So now we have an administration that is on the path of applying both fiscal and monetary policy for the wrong reasons and at the wrong time. John Maynard Keynes, the father of fiscal economic policy, would tell us economic stimulus is most effective during downturns, not when the U.S. economy has experienced four years of sustained growth despite the odds of a recession. To make matters worse, Donald Trump wants to eliminate The Fed’s independence to set interest rates, making that function more susceptible to political whims rather than impartial analysis.
SPOILER ALERT. The regional Fed bank in Atlanta is now predicting the U.S. economy will shrink 1.5 percent from January-through-March 2025. This decline, which is attributable to uncertainty associated with Trump’s across-the-board tariffs and lower consumer confidence, will give Trump and the MAGA Congress a justification for a stimulus package made up largely of tax breaks for the wealthy and major corporations. Seems like the only history the Trump economic team has been reading is the infamous quote by Vietnam War era Lt. Colonel John Paul Vann to justify napalm bombing as a counterinsurgency tactic. “It became necessary to destroy the village in order to save it.” And how did that turn out?
POSTSCRIPT
On last night’s edition of HBO’s “Last Week Tonight,” John Oliver honed in on Trump’s proposal to eliminate federal income tax on tips, a targeted gimmick to appeal primarily to hospitality industry workers. Sadly, Kamala Harris chose to also endorse the change in tax policy. Oliver gave a number of reasons why the no-tax-on-tips idea might not be a good one and why it would be extremely hard to implement. But he left out what may the most obvious reason this tax break would be unfair.
Since Trump originally made his no-tax-on-tips pledge at a campaign rally in Las Vegas, I will use the hospitality industry there as an example. According to the website GLASSDOOR.COM, “The estimated salary range for a food server at the Bellagio in Las Vegas is between $54,510 and $168,543per year, depending on seniority.” In contrast, SALARY.COM reports:
As of March 01, 2025, the average annual salary for a Public School Teacher in Las Vegas, NV is $59,989. According to Salary.com, salaries can range from a low of $41,053 to a high of $85,207, with most professionals earning between $50,077 and $73,189.
No one should be surprised. Oliver pointed out that most servers at many lower-end restaurants, even with tips, do not make enough money to have any income tax liability; so the proposal would be of no benefit to them. However, those at establishments that cater to the most wealthy would be the primary beneficiaries, while school teachers would likely face a tax increase based on the “Big Beautiful Bill” working its way through the House of Representatives. One more reason Trump says, “I love the uneducated.” They cannot do the math.
For what it’s worth.
Dr. ESP