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 “We’ve had two quarters: 1.5% decline in GDP,
that’s actually done the first quarter, and this quarter now is estimated by the
Atlanta Fed as being very, very close to zero,” economist Art Laffer told Fox
Business. “If it comes in negative, that will be the two quarters in a row –
that would be the definition of recession.”
With the economy stagnating and inflation soaring, stagflation is here for the
first time since the Great Inflation of the 1970s because of bad policies out of
Washington. A recession is inevitable as the government-inflated “boom” busts –
and we could already be in one. But pro-growth policies would help ease the
pain.
The pandemic prompted irresponsible and record-breaking deficit spending by
Congress, pumping in massive “stimulus” funds that raised the national debt by
$6 trillion to $30 trillion, or about $90,000 owed by every American.
And President Joe Biden has also been on a regulatory spree. His administration
has finalized 360 rules through June 17 with a cost of about $215 billion,
according to the American Action Forum. Compared to the same time since its
inauguration, the Trump administration completed 367 rules at an economic cost
of $1.2 billion.
Those bad policies by Congress and the Biden administration have been a major
reason why the economy is stagnating, with negative growth in the first quarter
of 2022 and likely little to no growth in the second quarter. And the Fed
purchasing that debt and printing too much money to chase too few goods resulted
in a 40-year high in inflation.
This stagflation affects employers and workers.
Firms now can hold less inventory for the same amount they paid previously,
which reduces their profitability and causes them to increase prices, cut costs,
or reduce output to keep up with inflation. And consumers have less purchasing
power.
Workers and employers must then reduce their spending and investment,
respectively. With workers producing less, productivity declined at the fastest
rate since 1947, contributing to why inflation-adjusted average hourly earnings
are down substantially over the last year.
Another issue is that safety-net programs were increased without work
requirements during and since the pandemic. Those programs included expanding
Medicaid, increasing child tax credits, and enhancing unemployment insurance
payments. This has created even more dependency on government.
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And these expansions of government contributed to soaring deficit-spending with
a 25% increase in the national debt in just the past two years. These handouts
also encouraged people not to work because they would lose more in payments than
they would receive from working. There are now 5.5 million more unfilled jobs
than unemployed workers.
In order to reduce the pain of the inevitable recession, Congress ought to adopt
pro-growth policies, similar to those between 2017-2019. These policies included
a concerted effort to reduce onerous regulations and to pass the Tax Cuts and
Jobs Act. They contributed to the U.S. records of the lowest poverty rate
(across most demographics) and the highest inflation-adjusted median household
income.
But excessive spending was an important factor that was missed then because
Congress spent too much. If Congress just reined in spending to no more than
population growth plus inflation, as outlined in the Foundation’s Responsible
American Budget (RAB), the $20 trillion increase in the national debt over the
last 20 years would instead have been a nearly $3 trillion surplus.
This would have meant more money in Americans’ pocket and more economic growth
from lower interest rates and less debt for the Fed to purchase to create
inflation. Which is why the Fed also needs a monetary rule, which would call for
it to have a much smaller balance sheet to reduce the quantity of money and a
much higher federal funds rate target.
Historically, the federal funds rate target must be as high or higher than the
rate of inflation. With the latest inflation rate being 8.6% and the federal
funds rate target being in a range of only 1.5%-1.75%, the rate target should be
much higher. While this would likely result in a quick and deep recession, this
is necessary given the government-inflated boom that must now bust.
Bad policies have driven this government failure that’s making the situation
worse before it gets better. For the sake of Americans, let’s end them now,
because more government isn’t the solution.
Vance Ginn, Ph.D.,
is the chief economist at the Texas Public Policy Foundation, and formerly
served as the associate director for economic policy of the White House’s Office
of Management and Budget, 2019-2020. Nathan Evenhar is a research associate at
the Texas Public Policy Foundation.
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