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Saturday, April 30, 2022
Stagflation is staring Biden in the face — but he refuses to change course
First we were told inflation was imaginary. Then we were told it was “transitory,” the result of COVID-inflicted supply-chain problems. Then we were told it was Russian President Vladimir Putin’s fault.
Now people are starting to admit the massive runaway spending of the Biden era has something to do with it. But we’re also facing stagflation, a mixture of inflation and slow growth, and the government also plays a role in turning inflation into stagflation.
As Milton Friedman famously warned, inflation is always and everywhere a monetary phenomenon. When the government pumps the economy up with excess dollars — something usually referred to as “printing money,” though a too-literal USA Today fact-checker hastened to assure us that much of the money created isn’t actually printed on paper — inflation results. When you have more money in the system than goods, the price of goods goes up. That’s inflation, and it’s what’s happening now.
We’re seeing it everywhere, from soaring food and gasoline costs to a housing “bubble” that looks more like inflationary pricing to increases in rents and automobile prices and just about everything else. The latest figures, meanwhile, show that the economy shrank 1.4% last quarter, making it the worst since the pandemic’s start; economists had expected 1.1% growth.
There are two ways to address inflation: Remove some of the money from the system, which the Federal Reserve did in the past via higher interest rates, and increase the supply of goods. At this point in 1980, when inflation soared, the federal funds rate was nearly 20%. Presently, it’s 0.33%.
In the Carter era, we saw not only runaway inflation but stagflation. People normally associate inflation with an overheated economy, but the sluggish Carter economy was not even close to running hot. We had economic stagnation and inflation, which led to the coinage of the term “stagflation.”
Now we’re seeing the same thing. And I suspect the reason is the same.
Scholars of administrative law refer to the 1970s as a period of “regulatory explosion.” The inflationary spiral was driven by the massive increase in spending under Democratic President Lyndon Johnson. But when Republican Richard Nixon came in, he didn’t do enough to restrain spending. Worse yet, he midwifed the greatest expansion of federal regulatory authority since the New Deal. In fact, in many ways the regulation was more intrusive and pervasive.
New agencies like the Occupational Safety and Health Administration and the Environmental Protection Agency were created and given sweeping mandates to remake American employment and industry. Volumes of new regulations were enacted.
This was great for lawyers: Membership in the District of Columbia Bar more than doubled between 1975 and 1986, from 20,311 to 44,394. And as Jonathan Rauch details in his excellent book “Demosclerosis,” the regulatory explosion called into existence a huge array of lobbyists, interest groups, etc. It made it harder for anyone to do anything.
So not only did we have too much money chasing too few goods, the classic source of inflation, we also had a whole new array of stumbling blocks in the path of people trying to produce those goods. Growth became more difficult, and as a result we got the dreaded stagflation.
As President Ronald Reagan noted in his first State of the Union Address, “American society experienced a virtual explosion in government regulation during the past decade. Between 1970 and 1979, expenditures for the major regulatory agencies quadrupled. The number of pages published annually in the Federal Register nearly tripled, and the number of pages in the Code of Federal Regulations increased by nearly two-thirds. The result has been higher prices, higher unemployment and lower productivity growth.”
Under Reagan, a combination of higher interest rates, deregulation and tax cuts got the economy moving again even as inflation was eventually brought under control. But now we’re in the same old Carter boat.
Team Biden hasn’t just been spending us blind. It’s also been regulating like crazy in ways that tend to reduce the supply of key goods. The administration has thrown stumbling blocks in the path of developing domestic oil and natural gas, blocked pipelines to bring in Canadian oil, increased taxes, added environmental rules and generally functioned in ways that tend to make it harder, not easier, to respond to the flood of money by adding production.
It’s no surprise that we find ourselves looking at stagflation again when we’re re-enacting the approach that led to it the first time.
If the Biden administration wanted to fight stagflation, it would be cutting red tape, encouraging business activity and investment and slashing federal spending. But it’s not doing that.