In the 1970’s, the US economy experienced an occurrence never seen previously. There was inflation that eventually peaked at 13% while the economic growth had stalled. The combination of a stagnant economy with inflation coined a new term, stagflation.
Milton Friedman won the Nobel prize in economics in 1976 for his contributions relating the money supply growth to economic activity. In 1980, the Federal Reserve adopted his theories. By closely monitoring the growth of the money supply, inflation was brought down to under 3%, where it mostly stayed for the next four decades.
At the same time, President Reagan convinced Congress to cut taxes for all Americans, especially for high-income earners who provide the majority of new capital needed for the economy to grow. The combination of sensible monetary policy and low individual tax rates led to an economic expansion that, except for minor hiccups in 1991 and 2001, lasted 25 years.
President Biden’s economic policy blunders coupled with a Fed that has stopped tying the growth in the money supply to economic activity and rising prices, has led to conditions that will eventually lead the U.S. back to stagflation.
The just released job report for September indicated that the US economy added just 194,000 jobs after adding an adjusted 366,000 jobs in August. That’s far below the 1 million jobs added in July. Economic growth is slowing after reaching a more than 6.5% annual growth rate for the first half of this year.
At the same time, inflation is rising significantly. As measured by the Consumer Price Index (CPI), prices are more than 5% higher than they were last year. The CPI for September will be released shortly. Even though economic activity is slowing, the number will show that inflation is still more than 5% on an annual basis.
According to Moody’s Analytics, a household earning the median income of $70,000 annually is spending an additional $175 per month on necessities like food, fuel and housing. While both the Biden Administration and the Fed say the inflation is temporary, a thorough examination indicates that is not the case.
Inflation Will Persist
Biden says the inflation is due to supply chain disruptions, so that once the economy fully recovers from the COVID recession, the inflation will disappear. Since there are other reasons mostly due to Biden’s economic policy blunders that are causing prices to rise, inflation will persist even after the supply chain disruptions are resolved.
Right now, the economy is producing at a level that is above the rate prior to the COVID recession. That means even though supply chain disruptions my exist in some markets, overall supply chain disruptions are contributing very little to the overall inflation rate. Rather, it is Biden’s policies that are leading to inflation.
Biden’s war on fossil fuels has pushed up oil and gas prices, and it looks like those prices will rise even further. Mostly because of Biden’s policies, unemployed workers are reluctant to return to the workforce. Biden added to their unemployment benefits, increased the food stamp payments, allowed them to not pay their rent and increased other welfare type programs. That results in higher labor costs for business as they raise wages to attract workers. Business must raise prices to cover this cost increase.
Biden's Spend Is $3T This Year
Biden has deficit spent more than $3 trillion this year, and he wants more to spend more. This adds excess demand to the economy, which pulls prices up The Fed is accommodating Biden by massively growing the money supply as they print $120 billion more money per month to buy government bonds. The Fed is also accommodating Biden by keeping interest rates near zero, even as inflation spikes.
Because higher wages, rising energy prices huge government budget deficits and an expansive Monetary policy will still be here after the supply chain disruptions end, there will be more inflation going forward.
Biden’s policy blunders are hindering economic growth and are leading to the highest inflation rates in more than four decades. That means Biden’s policies will lead to stagflation which will worsen if he is successful in passing his infrastructure and Build Back America bills, which increase spending and raise taxes.
Let’s hope those bills don’t pass and the Fed quickly reverses their current policy. Otherwise stagflation will be here.
Michael Busler is a public policy analyst and a Professor of Finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in Finance and Economics. He has written op-ed columns in major newspapers for more than 35 years.
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