The Great Inversion

Who knows how the Supreme Court’s ruling on tariffs will play out? Regardless, one of the great oddities of our odd times is that economic policy for the supply side is being used to manage demand — and vice versa.

Typically, the demand side of the economy changes rapidly while the supply side evolves at a gentler pace. Cycles (or demand) move markets today; structure (or supply) decides production tomorrow. To explain a cyclical fluctuation, look at demand. To understand what governs productive capacity, look at supply.

These truths, or truisms, reflect in economic policy. As a rule of thumb, fiscal and monetary policy are supposed to cope with cycles — that is, they are meant to be able to manage demand. Financial regulation and trade policy, meanwhile, are designed to influence market structure. That is, they are meant to encourage supply.

Or that was the picture. Sure, after the 2008 global financial crisis, adjustments to monetary policy unfolded normally. As a result of the crisis’s liquidity shock, central bankers across the world rushed to cut interest rates. That was a classic example of countercyclical monetary policy. But we also finally got an answer to this riddle: How many rates would rate-cutters cut if rate-cutters could cut rates? The answer: all the rates. The Fed Funds Rate went to zero.

Alas, a hiccup. Before the crisis, credit conditions were already accommodative. As a result, lower interest rates would not be enough to restore order. The answer that policymakers came up with was quantitative easing (QE), a non-conventional monetary policy involving bond purchases. Among other claims to fame, QE crowbarred monetary policy out of the cyclical domain and into the structural. In the end, there was no lasting crisis in asset prices. No correction. Instead, we “nationalized” market liquidity. Monetary policy has been a supply-side tool, at least in capital markets, ever since.

Next, financial regulation. In the 2000s, economists had seemed to promise an endless and stable expansion — “the great moderation.” In the aftermath of the crisis, the Group of Twenty (G20) was somewhat peeved. It let loose the dogs of macroprudential oversight. Bank regulators enhanced a trinity, one meant to stop banks from causing another crisis: higher capital, more liquidity, and less leverage. Of course, this trio did not lower aggregate risk in financial markets or rule out financial contagion across markets. But never mind. Financial regulation, typically a supply-side economic policy, had asserted its influence on the cycle for bank credit.

Enter Trump. Exit Trump. Enter Biden. Exit Biden. Enter Trump once more. This sequence, too, introduced trade and fiscal policy reconfigurations. Under the first Trump administration, the early stirrings of a trade revolt were announced. The second Trump administration then enacted a revolution in 2025. No longer would trade policy be passive, “set-and-leave” economic policy. Instead, tariffs would intervene in — you guessed it — the demand side. Today, financially strained Americans can no longer purchase seventeen Chinese dolls at Christmas, only two or three. Sad.

Let us not forget Joe. President Biden campaigned on the promise of being a reconciling centrist — a reversion to the mean. He then governed so far to the left of Bernie Sanders that it made Sanders look like a counterrevolutionary kulak. The numbers were astonishing. The Committee for a Responsible Budget estimates that Biden ‘approved $4.7 trillion in new ten-year debt through legislation and executive actions.’ Yes, Trump reached for the fiscal spigots during a pandemic. His One Big Beautiful Bill Act was also very spendy. But President Biden’s Infrastructure Investment and Jobs Act was pure industrial policy. True, global competition with China might require new factory plants. Global competition with China might also end in failure. Biden hurried both processes by introducing a massive degree of central planning at home.

This is the point — the inversion of economic policy. Under the last three presidents — Obama, Biden, and Trump — the U.S. economy has pivoted trade policy away from supply and towards demand. Fiscal and monetary policy no longer serve to merely smooth financial and economic activity on the demand side. Now, they prop up, respectively, market liquidity and growth on the supply side. Meanwhile, financial regulation and trade policy have been stripped of their duties as laissez-faire encouragements for production. Today, these policy tools are tasked with steering the credit cycle and determining the aggregate consumption of goods. It remains to be seen what, if anything, this policy inversion will achieve. But the country’s increasing debt? That is very real.

No human mind can conceive of the entire economy. It is too complex. It is also too mutable, which is one reason why central planning schemes always fail to meet their professed objectives. Nonetheless, we can identify and debate the broadest of shifts. To that end, if Uncle Sam’s politics appear polarized, his economic policy has flipped its poles. North is south and south is north, with any long-run consequences yet to unfurl.