I don’t recall whether all of this was covered in my undergrad econ courses or in my micro and macro classes from business school, but there are a few basic ideas that have driven the world view of many economists for most of the last 100 years.
You don’t have to be an economist or have an MBA to invest, but it is helpful to be familiar with some basic macroeconomic principles because they affect the economy and, by proxy, business value, which is the main driver of stock market investing.
Let’s review some that are relevant today:
- Removing trade barriers permits production to shift to areas with a relative advantage (cheaper labor, better climate, access to raw materials, educated workforce, etc.), raising standards of living.
- Independent central banks setting interest rates and other monetary policies reduces the temptation for leaders to goose the economy for short-term advantage with long-term costs.
- Tariffs can help new businesses get a foothold in industries already dominated by other countries.
- Tariffs can protect strategically important industries in a country. (Rice in China is a good example, and countries have protected other critically important industries like steel, transportation, etc.)
- Tariffs are a tax that increases costs which fall disproportionately on small businesses and consumers. (Tariffs used to be the primary revenue source for the federal government. They were replaced by a progressive income tax in no small part because the tax burden fell disproportionately on the little guys.)
- Widespread tariffs are inflationary because they increase prices and reduce the incentive for efficiency.
- Businesses like a stable, predictable environment in which to make investments, hiring plans, and supply chain decisions. Clear rules and laws—even if considered somewhat suboptimal—are generally preferable to uncertainty and unpredictability.
- Uncertainty in labor markets tends to reduce consumer spending, as workers have concerns about job security and pay cuts (especially when coupled with the prospect of increased inflation).
- Companies delay capital expenditures in an unpredictable environment, as it is difficult to project costs and return.