Government economists sometimes try to fight the last war rather than the one they’re in.
It’s understandable.
A generation of central bankers responded as best they could during the Asian Crisis, the Dot-Com bust, and the Great Financial Crisis. Governments learned a way of dealing with shocks that came out of the financial system, broadly speaking.
When Covid came along, governments and central banks reached for the same tool that they’d used in prior crises.
The money printing machine went brrrrr, churning out liquidity.
But it was a mistake. They weren’t primarily dealing with a shock emanating from the financial system. The real underlying problem was reduced production.
The virus had scrambled most firms’ ways of doing things, and most supply chains. Weird problems emerged, like finding enough packaging to send flour and sugar off to bakers at home rather than commercial bakeries.
A small bit of monetary easing could help smooth things along but could not solve the underlying problem. And a large amount of monetary easing would mainly cause inflation.
The tariff shocks coming out of the United States have similar features. A 64% one-week drop in U.S. import container bookings in early April 2025 sounds very 2020.
Last week, I participated in a panel discussion hosted by the Institute of Finance Professionals New Zealand – INFINZ. Panellists were meant to be discussing ‘Where to for Monetary and Fiscal Policy and the outlook for Financial Markets.’
But the main topic wound up being American tariff policy and its consequences.
There was some discussion of whether America’s Federal Reserve ought to cut interest rates to deal with the challenge.
Such a response would be fundamentally misguided.
Imagine, for the moment, that America were running a coherent tariff policy. If the American government worried about encouraging defence manufacturing capabilities domestically and among its allies, it could have announced a well-considered schedule of tariffs – and stuck with it.
Prices in the US would increase, but not in a way that monetary policy should fight against unless they made people expect continued price increases. A one-off increase in prices is not inflation.
The set of coherent tariffs – the kind America has not adopted – would make the American economy less productive during normal times in exchange for potentially being more ready for some future war. Printing extra money to throw at a less-productive economy, especially without a credible tightening path, is a recipe for inflation.
But the actual tariff shock is worse than that because it is unstable and unpredictable.
It is far more like the Covid shock, where it was impossible for anyone to really tell what would hit them next. Policy changed constantly and unpredictably. Suppliers either at home or abroad hit strange difficulties; critical parts that firms might not have thought much about previously suddenly became unavailable. Ports seized up. Shipping became unreliable.
During Covid, even if you didn’t like parts of what governments were doing, there was a logic to it. And once the vaccine was developed, the long-term outlook became a lot more certain.
With the current shock, American firms that have depended on foreign suppliers for parts and materials simply cannot tell whether it makes sense to invest in domestic manufacturing or to wait things out.
The hit to American productivity will be larger than it would have been under a more coherent tariff regime. And I don’t think people have really appreciated the scale of that problem as yet.
In the early days of Covid, it was well worth following American logistics experts on Twitter, like Flexport CEO Ryan Petersen, to keep track of what was going on, and what was yet to hit. The same is true now.
They point out that it takes about a month for a container to get from China to Los Angeles. Tariffs applied to goods leaving Chinese ports in early April would affect West Coast ports in May. Then warehouse stocks start drying up. And then shelves start emptying.
New Zealand firms will not just experience this as a drop in demand for their goods from a now-poorer world.
They will also experience it as supply chain disruptions. American firms, and other countries’ firms that depend on American products, will become less reliable, more expensive, or both. But other firms might find bargains from Chinese suppliers with excess capacity.
Shocks to the financial system could yet come. Bond market instability in April was worrying. And, like with Covid, there are real demand-side effects for central banks to watch. Those could be more substantial this time.
But America’s tariff shocks are not otherwise the kind of thing that monetary policy can fix.
Sometimes, the last battle provides useful training. Covid may have given the world’s central banks a useful inoculation, helping them remember how not to deal with supply shocks.
To read the full article on The Post website, click here.