I have said this before – as recently as the February 1, 2023. This isn’t working. This isn’t going to work without a deep and dangerous recession. This is, in fact, economic insanity.
The inflation rate in January of 2021 when President Joe Biden took office was 1.4 percent. By May of 2021 Mr. Biden’s wild spending spree with the full cooperation of the Democrat led Congress had risen to 5.00 percent. By January of 2022 it had burgeoned to 7.5 percent and it continued to increase until it reached 9.0 percent in June of 2022. Since then it has moderated slightly and currently stands at 6.4 percent. These numbers represent year over year increases from the previous corresponding months. But the reality of this is that since Mr. Biden took office total inflation has increased cumulatively by sixteen percent.
The inflation has been caused by an excess of government (deficit) spending in the name of economic stimulus following the collapse of the economy due to government closure of the country in response to COVID-19. I’ve noted in previous columns that the first round of economic stimulus was necessary to “shock” the economy to restart following the shutdown. The second round was probably necessary but with all things government it was excessive. It was the moral equivalent to throwing both ends of a rope to a drowning man and rushing off to see what other “good deeds” could be done. The second round could and should have been about half of its amount and targeted towards supporting existing main street small businesses instead of raises for teachers and public employees union members. The second massive spending bill was a form of economic insanity which is borne out by virtue of the facts that hundreds of billions of dollars went missing due to fraud, bureaucratic incompetency and the normal Washington focus on the optics rather the objectives.
Mr. Biden has not accepted any responsibility for the inflation rate nor for reducing it to pre-administration levels. He has basically said that it is not his job to deal with inflation and that it is the responsibility of the Federal Reserve System. He was wrong on that as he is wrong about most policy pronouncements but we’ll get back to that.
In March of 2022 Chairman Jerome Powell announced that the Federal Reserve would raise the federal discount point by a meager 0.25 percent. Over a year after the rapid and steady increase in the inflation rate began the Federal Reserve System undertook the most tepid response that it could. Since that point Mr. Powell has increased the discount rate eight times in varying amounts from 0.25 to 0.75. The total rate increases since the first one is 4.05 percent and they now stand at 4.75 percent. At one point it was suggested that the rate would not exceed 5.0 percent but already Mr. Powell in the latest announcement has suggested that it would rise to 5.4 percent by the end of the year. It will go way beyond that because doing the same thing over and over and expecting a different result is a form of economic insanity.
Mr. Powell’s stated objective is to raise the discount rate to a point where it will discourage business investment and thus slow the economy. His tell* is an increase in unemployment – which is the normal result during an economic slowdown. But it is also the choice that ensures that the burden of economic recovery will fall on working men and women and not on the politicians and public employees who caused the problem – regardless of the state of the economy a combination of mandatory payment of taxes and continued deficit spending will immunize the politicians and public employees from this economic insanity.
Neither Mr. Biden nor Mr. Powell seem to be unwilling to follow an alternative method of addressing inflation. A way that does not risk the sharp and lengthy recession that is looming right in our face. You can starve inflation – which is Mr. Powell’s intended path, or you can grown your way passed inflation. The former risks with virtually dead certainty a recession. On the current path, we are no longer talking about whether there will be a recession but rather how deep and how long. The higher the discount rate the more significantly the downturn and the steeper the downturn the longer the recession will last. The lag/lead time between rate increases and the effect on investment and production help ensure that the recession will be long and deep.
But growing your way out of inflation suffers none of the risk of a recession. It does require two things that are an anathema to the political class and the public employee unions. The first requirements is that you end immediately deficit spending. I don’t mean that you have to cure the current $31 Trillion deficit but rather that the government does not add to the deficit directly or indirectly – directly means Congress cannot produce a deficit budget (spending more on current expenses than you have in current revenues, while indirectly means such acts as forgiving such things as student loans or writing off other forms of indebtedness to the government.) It also assumes that no additional taxpayer money is spent for so called “stimulus.” The second requirement is that the rules that impose an undue burden on energy production and small business growth must be removed. We know that when former President Donald Trump began removing such regulations that we achieved energy independence virtually overnight and that business growth accelerated rapidly. We also know that the invasive regulations imposed by former President Barack Obama resulted in the slowest economic recovery [from the Bush/Obama recession of 2008/09) in the nation’s history.
I say that these two elements are an anathema to the political class and the public employee unions because taxpayer money is how politicians buy the votes of the public employee unions and other special interest groups (green energy, abortion providers, and minority advocacy groups). Ending deficit spending will mean that those groups will benefit less and have less money to engage in political campaigns.
But more importantly, EQUITY demands it. There are any number of maxims of equity but the most important two are:
In this instance, the current inflation was caused solely and only by the politicians and the government bureaucrats. It was not caused by an imbalance in supply or demand. It was caused solely by forcing excess money into the system through excessive government spending and the resulting issues of government bonds and the printing of money so that the government (Federal Reserve) could purchase the bonds. Immunizing the politicians and pubic employee unions from the pain of inflation and/or the looming recession will reward them for causing the current inflation.
There is no equity in forcing working men and women to bear the total brunt of the willful mistakes of the politicians and government employees.
At one time the Democrat Party represented working men and women but they have abandoned that standard long ago. The test will now be whether the Republican Party will assist working men and women or remain the club for the country club set.
*A tell is a term used by poker players that suggests that a change in the behavior of another player can be read as an assessment of his/her hand. For instance if you look down and to the left when answering a question, it is likely that you are lying.