Biden must act fast to avoid repeat of 1970s inflation woes
Readers of this paper who are under the age of 50 do not recall the last time the United States experienced a rapid increase in the price of, well, everything.
Recently the latest inflation data was released, and the report was staggering. Last month, prices rose by 7% — the largest increase since 1982. This figure represents an acceleration of upward pressure on prices that has been taking place since the end of the short-lived, but severe 2020 recession.
Left unchecked, every American who receives an increase in their wage or salary in 2022 better hope that it approaches double digits, otherwise they will only be able to say, “Thanks for cutting my pay” to their employer.
Yet, it does not have to be this way. There are steps the Biden Administration, Congress and the Federal Reserve Bank can take today to prevent a disastrous repeat of the 1971-82 period when a new term, “stagflation” reared its ugly head.
Inflation takes place when the demand for goods and services increases at a faster pace than suppliers can produce. Stagflation occurs when the overall supply of goods and services declines. Stagflation is the worst of all economic evils because when supply falls throughout a nation it not only pushes up prices, but it also leads to a recession and higher unemployment.
What we are seeing today is, for now, demand increasing extremely fast while supply is slightly falling, or depending on the sector, barely increasing.
This problem has been created by several sources.
First, the Trump and Biden administrations, to fight the economic dislocation caused by the pandemic, sent out trillions of dollars in stimulus checks, whether consumers needed them or not, to boost demand and shore up consumer and business confidence. That coincided with drastically expanded unemployment benefits and monthly tax credits paid out to families, even if their finances were on solid footing.
Simultaneously, the Federal Reserve Bank, adjusting for inflation, has provided the nation with negative interest rates throughout 2021 and today. If you have a 3% mortgage payment, with inflation of 7% you are paying negative 4% interest to your bank. This has help fuel an explosion in home buying like the pre-“Great Recession” binge of the early 2000s.
On the supply side of the equation, both Trump and Biden have fueled rising input costs of production with their economically absurd foreign trade policies. Neither of these gentlemen have subscribed to the centuries-old belief that free trade leads to economic growth, prosperity and lower inflation because of a steady flow of products and competition. Instead, we have seen an increase in tariffs on most of our trading partners, which forces them to raise prices while allowing American companies, who now have less competition, to follow suit with their own increase in prices.
Moreover, economists keep pointing out the dramatic expansion in government spending has led to historic reductions in the labor force. In many cases, throughout 2021, government benefits paid far more than work so people simply pulled out of the labor market. This further decreased the supply of goods and services and has contributed to our current state.
It cannot be overstated that the pandemic has led to supply chain issues that neither Trump nor Biden could have foreseen or fixed quickly. Yet, there are some things that President Biden could do now to help 2022 look more like the previous 40 years.
First, he must avoid pushing for an even greater expansion of government spending that creates disincentives for people to work. Second, he needs to reverse Trump’s anti-immigration stance and make it far easier for people to enter the country and join the labor force.
Third, his current regulatory agenda that has drastically increased the rules, paperwork, and expense of owning a business must be reined in. Every new regulation is a cost. Every cost gets paid for when we go shopping.
Fourth, unlike his predecessor, Biden needs to openly work with the Federal Reserve (see Ronald Reagan and Paul Volcker) to raise interest rates now — and by a large enough amount to slow the irrational growth of demand we are seeing.
Whether Biden has the political courage to do this is uncertain.
What is certain is that if he does not, this decade is going to look a lot like the 1970s — and no one should want that.