Read the second-quarter accounts past the headline. Real GDP grew at an annual rate of 1.5 percent, but the Bureau of Economic Analysis also reported that real final sales to private domestic purchasers — households and businesses, stripped of trade and government — rose at 4.2 percent. Profits from current production rose $400.9 billion, against $74.4 billion in the first quarter. Government spending fell. The private economy did not slow; it was measured alongside a public sector in retreat.
That is the finding worth defending, because it was not supposed to happen. A shipping lane carrying a large share of the world's seaborne crude has been constricted for six months. Freight, insurance and fuel all repriced. The textbook says a supply shock of that size produces a contraction. Instead capital moved, contracts were rewritten, and output kept expanding through it.
A shock this size is a stress test, and the thing under test is not the Treasury. It is whether prices are still permitted to do their work.
The Federal Reserve deserves credit for the part it did not do. On 29 July it held the target range at 3.5 to 3.75 percent, judging that “economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East.” Three members dissented in favour of a quarter-point rise. A committee arguing about whether to tighten during a war is a committee doing its job; the failure mode was always the other one.
Michael Strain of the American Enterprise Institute put the deeper case on 27 August, against critics on both flanks. “In a growing economy, you can do better without others doing worse. This dynamic fosters tolerance, pluralism and support for political liberty.” That is not a slogan about GDP. It is the observation that a society which has stopped growing has to settle every question by taking something from somebody, and that societies which do that are not pleasant to live in.
The concession is that growth of this kind flatters a weak underlying trend, and Britain is the cautionary tale. The Office for National Statistics put UK output up 0.4 percent in the quarter and 1.2 percent on the year, with production flat at 0.0 percent and real GDP per head up just 1.0 percent over twelve months. A country can post respectable quarterly numbers for years and still make its citizens no better off. Productivity, not the headline, is the variable that matters.
The other concession is inflation, and it is the administration's own doing as much as Tehran's. Some of the price level is crude and freight. Some of it is a tariff schedule that puts a domestic surcharge on goods a foreign blockade has already made dear. There is no free-market argument for taxing your own consumers to punish a supplier, and pretending the two sources of inflation are one is how a real supply shock gets used to excuse an avoidable policy shock.
So: hold the rate, drop the tariffs, and let the price system finish the reallocation it has already started. The profits in that release are not a scandal to be taxed away. They are the signal drawing capital toward the shortages — refining capacity, shipping, storage, generation — that caused the shock in the first place. Interrupt the signal and the shortage lasts longer. That is the whole argument, and this quarter is evidence for it.
