Another Recession Is Over

As we emerge from the pandemic, Joe Biden's economic policy bungling is driving America into a brick wall of malaise and stagflation.

For those of us who lived through it, the comparisons to Jimmy Carter's failed presidency are hard to ignore. 

So, why is the Biden administration so determined to ignore both the cause of Carter's economic failure and President Ronald Reagan's very successful formula for reversing it?

Absent such an economic awakening, it's going to be a tough three years.

>>> Is Stagflation Returning in 2022?

Like Carter, the Biden administration is acting as though it can ignore fundamental economic problems forever. News flash—it can't.

The longer we wait to seriously address inflation, labor shortages, and supply chain problems, the worse the threat of an inevitable and deep recession becomes.

Case in point: On Wednesday Biden, claimed December's inflation report showed “a meaningful reduction in headline inflation over last month” demonstrating that 'we are making progress in slowing the rate of price increases.” If you are a working or middle-class American that may have surprised you.

The Bureau of Labor Statistics' actual report on inflation showed that in December inflation hit 7 percent for 2021—the highest inflation rate this country has seen in 40 years.

Most Americans have never lived through anything like the current inflationary surge. Those who have, recall all too well the ruinous consequences of applying failed Keynesian demand-side fiscal policies to a sluggish economy beset by rising inflation.

Simply put, increasing demand by infusing more money into an inflating economy results in hyper-inflation rather than economic prosperity. If common sense isn't enough to confirm this result, there is ample historical evidence.

In 1971, President Richard Nixon declared that he had embraced Keynesian economics.

By the middle of the decade, his successor, President Gerald Ford, was struggling—and failing—to “WIN” (i.e., “Whip Inflation Now”) the battle against rising inflation.

President Carter criticized Ford for failing to beat inflation then doubled down on government spending.

After pledging to eliminate the federal deficit, Carter saw it increase during his term from $27.7 billion in 1979 to nearly $59 billion in 1980.

By the end of the decade, America was thoroughly mired in the nightmare of “stagflation.” 

Fiscal stimulus and easy monetary policy pushed inflation to astronomical levels that wiped out household savings and made basic necessities increasingly unaffordable for working families.

When Ronald Reagan took office in 1981, one of his first orders of business was to join forces with Federal Reserve Chairman Paul Volcker to end this self-perpetuating cycle.

By that point, though, the only way to bring inflation down to a manageable level was to endure a sharp, painful recession. Mortgage interest rates reached the high teens.

But it was only after that economic hangover ended and economic fundamentals returned to a stable equilibrium that America was able to experience the economic miracle for which the 1980's are known.

Reagan's approach was politically courageous, given the tendency of American voters to punish the sitting president for economic downturns. It's called leadership, and he was ultimately rewarded with a landslide re-election victory in 1984.

Today, President Biden is taking the opposite approach. Faced with the potential for rising inflation coming out of the pandemic, Biden opted to act as if nothing was wrong and bull ahead with his plan to “fundamentally transform” the American economy with trillions of dollars in new government spending.

After Democrats and Republicans had already spent about $5.3 trillion on bipartisan COVID relief during the pandemic, Biden and his Democrat allies dumped another $1.9 trillion into the economy last March for no better reason than to claim credit for another unnecessary round of stimulus checks.

The impact was to juice already energized demand while reducing supply with government checks that encouraged leisure at a time when the pandemic was already slowing a labor force recovery.

With fewer people working and businesses having under-produced and under-ordered during the recession, soaring inflation was going to be the inevitable result.

It's not like they weren't warned, and not just by people on the right.

Leading economists from previous Democratic administrations, including Larry Summers and Steve Rattner, wrote extensively about how Biden's massive government spending was going to lead to a surge in inflation and eventually a recession. The data kept proving them right, but the Biden administration refused to pay heed.

Even as evidence mounted that inflation was here to stay—and getting worse by the month—Biden kept pushing for even more deficit spending in the form of the $3.5 trillion “Build Back Better” bill.

In fact, as recently as last week, Biden's chief economic advisor, Brian Deese, was promoting that spending plan as the way to “address” inflation. Seriously, he actually said that. The good news is that the bill appears to be dead, at least for the time being.

Unfortunately, the inflation Kraken was released in March and restraining it will take more than simply preventing the Biden administration from doing additional economic harm.

Fortunately, in contrast to the situation in the 1970s, we have an example in living memory of just what needs to be done to address surging inflation – a combination over time of aggressive Fed policy to reduce demand combined with policies such as tax and regulatory reductions that encourage an increase in supply.

That's right. If we reduce demand and increase supply, prices will come down and inflation will subside. It's really not rocket science.

With respect to Federal Reserve Bank policy, the Fed has also been slow to recognize the inflation problem (for months calling it “transitory”), possibly because the Fed was itself responsible for helping create the conditions that led to this crisis.

After almost a decade and a half of historically low interest rates through successive rounds of “quantitative easing,” the Fed's Board of Governors has been reluctant to believe that meaningful inflation was even possible.

The Fed now acknowledges that inflation is a severe threat and is belatedly taking tentative steps to raise interest rates in 2022. But the impact of Biden's reckless spending is counteracting the therapeutic effects of anticipated tighter monetary policy.

The results are tragically predictable.

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Rising inflation is drowning out wage gains and reducing the spending power of American workers, all while wiping out the value of savings people have spent a lifetime accruing. The longer this goes on, the worse it gets.

If Democrats understood the law of supply and demand, they would realize their policies are making a bad situation worse. Unfortunately, they just can't seem to help themselves. Ever-higher government spending and ever-more government control are the essence of their ideology.

Unlike both Republicans and Democrats during the Reagan years, the people who hold power in Washington today clearly have no respect for the free market. But the free market doesn't care what they think. The law of supply and demand is not a law you can amend.

I'm extremely concerned about what lies in store for this country.

The longer Biden and his allies keep their heads buried in the sand, the worse the eventual reckoning will be.

If we had dealt with inflation proactively, the remedy might have been merely inconvenient.

Now, we're staring down the maw of a major recession that will cause serious economic pain for millions of Americans, as the economy jumps from the pandemic frying pan into the inflation fire.

Source : https://www.heritage.org/budget-and-spending/commentary/america-lurching-pandemic-major-recession-after-bidens-massive

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