Often we worry about the wrong thing. And sometimes, events turn out better than feared, a current example being the state of the economy. For now, it’s a booming economy without the expected — and hoped for by Trump Republicans — recession during Biden’s reign. Financial markets are once again dancing around all-time highs.
Business cycles are a fact of life, with an occasional recession with high unemployment and declining GDP. The Pandemic, made worse by then-President Trump denying its existence, caused many severe economic disruptions. Labor shortages, a combination of stay-at-home due to the Pandemic, and retirements of the aging Baby Boom generation, contributed to domestic shortages of goods and services. Interruptions of supply chains and military conflict abroad disrupted the entire world economy, curtailing world trade resulting in shortages of goods. The inevitable result of these shortages was rising prices, inflation, not just at home, but worldwide.
In January 2021, President Biden inherited an economy with those rising prices, along with high unemployment and supply chain disruptions. Inflation was a world-wide phenomenon, but Republicans conveniently held Biden solely responsible. Nevertheless, it was up to the President, Congress, and the Fed to do something about it.
The Fed responded, but not until 2022, with its major available tool, short term interest rates, raising them to counteract inflation. Economists refer to raising interest rates as a contractionary monetary policy. Higher interest rates discourage borrowing and spending, thereby reducing demand for goods and services with the intended effect of easing pressure on prices.
The downside effect of this policy is that reducing demand for goods and services, and slowing down the economy, risks unemployment and recession. How much do interest rates have to be raised to effect the desired reduction of the inflation rate? Can the needle be threaded so as to bring about a “soft landing,” a reduction of inflation without a recession?
It was practically an article of faith among pundits, and even many economists, that recession was inevitable. And, how convenient for Republicans in an election year — after laying the blame for world-wide inflation on President Biden, blame a probable recession on him as well.
As expected, the Fed sharply raised interest rates. As intended, the inflation rate has declined, even more than many critics had anticipated. The U.S. inflation rate has not reached the Fed’s goal of two percent, but it has declined more than in other major world economies. Prices of some items, including housing, rent, and restaurant meals continue to remain high, but many items have stabilized in price. Some have even declined. Some workers have experienced real wage growth.
What has baffled many critics is that this has all happened not only without recession, but with a booming economy, outpacing Japan, China, and Western European nations. How could this happen?
The short-hand explanation for inflation is that it is too much money chasing too few goods. That’s correct in so far as it goes, but explains nothing about how the “too much money” or the “too few goods” comes about. Critics, especially Republican politicians, put the emphasis on “too much money,” as a result of the stimulus bills provided to help businesses and people get through the Pandemic. The last stimulus Bill under the Biden administration was especially, and unjustifiably, hammered as solely to blame for inflation.
Although some economists and other critics early on discussed interrupted supply chains as cause of the shortages and high prices, too little emphasis was placed on the role of supply-chain remedies in taking pressure off prices. The Fed could, and did, address the “too much money” side of the equation. The Fed action undoubtedly played its necessary role. But it was the loosening of supply-chains and increased employment that enabled the increase in supply, taking pressure off prices, while neither reducing economic activity nor causing recession.
Donald Trump and his Republicans have been counting on a combination of inflation and a “Biden recession” to be key to regaining the presidency and control of congress in the November ’24 elections. While pundits and even some economists are bewildered over the fact that there is no recession, Republican leaders clearly express their disappointment and insist that “the economy is terrible.” Mr. Trump is explicitly hoping for a recession, along with crashing financial markets that he had predicted upon Biden’s election.
One can never rule out such events. As baseball sage Yogi Berra reminded us, “It’s tough to predict stuff, especially in the future.” But even conservatives must face facts as did former Trump advisor, conservative economist Larry Kudlow. Fox News anchor Sandra Smith noted that the Biden administration was “bragging” about the better-than-expected economic growth. Kudlow’s reply: “Look, it was a good quarter, don’t get me wrong, 3.3 percent beat estimates. And the last quarter was a good quarter, 4.9 percent. Absolutely. So he gets his due. If I were he, I would be out slinging that hash, too. No problem.”
Kudlow and his host couldn’t resist tossing some cold water on the good news, reminding listeners that “…a big chunk of it is government spending.”
There they go again, trying to scare us with the government spending boogey man once again, demonstrating only that the more you drive over a dead cat, the flatter it gets. What conservatives don’t acknowledge is that government spending, including state and local government spending, is about seventeen percent of GDP occurring under both Democratic and Republican administrations. Those “unwelcome” government expenditures are also receipts, contributing to incomes of businesses and individuals. Moreover, personal consumption remains by far the largest component of GDP, around seventy percent. Consumption has contributed more to recent GDP growth than each of the other components, including government spending.
Regarding increased employment, loosening of supply chains, and increased supply of goods and services, Nobel Laureate Paul Krugman recently remarked, “Its immigration, stupid.” More on this in a subsequent column.
Meanwhile, although the economy is much stronger than many critics had predicted, there are still remaining problems and issues. Chief among these, current wage growth notwithstanding, is the continuing inequality of income and wealth that is a cause of economic and political instability.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears monthly in the Monroe Times.
