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Stagflation Will Challenge the President in 2021

Stagflation Will Challenge the President in 2021
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By Tuesday, 03 November 2020 08:06 AM Current | Bio | Archive

Whoever wins the presidency, the White House and Federal Reserve will face another tough year in 2021.

Thanks to the CARES Act stimulus payments to households, enhanced unemployment benefits, aid to small businesses and expanded Fed lending programs, the economy rebounded more strongly than expected.

After contracting at an annual pace of 31.4% in the second quarter, GDP increased 33.1% in the third quarter. However, the stimulus has mostly run its course, and the pace of recovery is slowing.

Permanent Layoffs

Record numbers of small businesses, temporarily shuttered, are now permanently closing, and many bricks-and-mortar retailers are in chapter 11 bankruptcy. Venerable corporate names are permanently cutting staff in petroleum, media, airlines, banking, insurance, automobiles and elsewhere.

This winter, even with a vaccine rolling out, the economy will be smaller than it would have been without the pandemic, and 4 million or 5 million Americans will be added to the rolls of the permanently unemployed.

This second wave of pink slips is more highly concentrated among professional workers — lawyers, bankers, engineers, technicians and managers — whose skills are more industry-specific than when they left school. Many are now redundant.

For example, where does a pilot permanently separated from Delta Air Lines go when United and American also see little prospect for business travel returning to pre-pandemic levels?

Disney is discharging 28,000 workers, because its theme parks are either closed, as in California, or operating at reduced capacity but this distracts from the studio's more fundamental problem.

The company owns 14 major film franchises, such as Pixar and Indiana Jones, and routinely spends $200 million to produce a movie. Paying for these relies on big theater ticket sales in the early weeks after release and the buzz generated driving interest in its streaming service, merchandise, theme parks, resorts and cruises.

COVID will close many theaters for good, as consumers increasingly enjoy first runs at home, and studios simply can't charge as much for per person for home viewing new releases. Movies made exclusively for streaming services will have smaller budgets without theater admissions to help defray costs. The long-term prospects for animators, script writers, directors, film editors and actors are shifting down.

What to do with all those disappointed folks — along with petroleum engineers, lawyers and professionals in other industries — is one tough puzzle.

Jekyll and Hyde

The Fed is not only out of bullets but, like Dr. Jekyll, has created its own Mr. Hyde. We face stagflation — the paradox of high unemployment and inflation.

During June, July and August, the CPI rose at a 6.3% annual pace as compared with the prices the prior three months. In September, inflation calmed down to a 2.5% pace but largely because the service sector, enduring weak demand that is driving business closures, saw hardly any movement in overall prices.

The latter will change once we have a vaccine. With so many service establishments permanently shuttered, inflationary pressures will be acute as consumers return to many fewer restaurants, dry cleaners and fitness centers, radically downsized airlines and the like.

We will soon have run the string on lower oil and gas prices and productivity gains and imports keeping down costs for most durable goods, save autos, and consumer items such as apparel.

Many durable goods are in short supply. Inflation for goods, less food and energy, continued brisk in September and has been running 8.6% since June. Shortages will persist into and through 2021.

This winter, as vaccines become widely available, in some sectors — such as airlines — and places — such as restaurants in large cities — workers that have been displaced will remain unemployed, but elsewhere demand will surge, creating continuing shortages of capacity and inflation.

Skilled Workers Needed

Expanding industries — web-based services, robotics, electric cars and the like — all need workers with skills that businesses can't easily find. They are suing the Trump administration to open up immigration, because it's cheaper to import skilled workers than retrain the unemployed.

A national re-employment strategy could offer subsidies to employers to hire and retrain workers, who are jobless for more than three months and formerly employed in other industries, equal to 25% of their former salaries for two years. And continue unemployment benefits up to an equal amount. Eligible salaries and subsidies could be capped at $200,000 and $50,000.

Expanding the pool of skilled labor in growing industries would both relieve cost and inflationary pressures and provide new opportunities for the structurally unemployed.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1

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Whoever wins the presidency, the White House and Federal Reserve will face another tough year in 2021.
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Tuesday, 03 November 2020 08:06 AM
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