Why does America look destined for stagflation?
The Labor Department reported last week that unemployment claims for the first time reached their highest level since last November, when the delta variable was first giving way to Omicron. That, as inflation reached 9.1% in June, wholesale prices rose 11.3%.
Welcome (back) to stagflation – a bad mix that last struck under President Jimmy Carter, when Joe Biden was a young senator.
Jobless claims for the week ending July 16 rose to 251,000, an increase of 7,000 from the previous week. Since April, new orders have gone up by 85,000 — even though COVID has faded, you’d expect it to drop, especially since the workforce participation rate has also fallen since March.
Add to that a steady rise in continuous unemployment claims, up 122,000 (on a seasonally adjusted basis) through July 9; 1,384,000 Americans collect unemployment. combo (more people unemployed, more people stay unemployed) strongly indicates that the unemployment rate is about to rise.
Meanwhile, real GDP fell in the first quarter at an annualized rate of 1.6%, and the Atlanta Fed is forecasting another, and possibly larger, decline for the second quarter, which ended on June 30 (official word comes later this week).
Two consecutive quarters of negative growth is identification from stagnation. And the Fed promises (and quite rightly) to keep raising interest rates to try to control inflation – even though that will likely lead to more unemployment, adding to the anti-growth pressure.
Economic deflation combined with high prices earned the nickname “stagflation” under Carter as prices rose as much as 13.5% annually, unemployment was at 7.8% and growth became negative. It’s a triple hit of pain: higher prices, people out of work, and fewer goods and services.
Then as now, the nation faced a gasoline shortage. Americans were struggling with an economy in shambles.
Carter blamed the audience, summing up the problem as a “crisis of confidence” in his famous “Malaise” speech. Today, President Joe Biden blames Vladimir Putin, Republicans, and greedy oil companies (when he’s not pretending that everything will improve into a reality soon).
However, Biden and his fellow Democrats were warned about inflation, even by economists on the left, before they hit their $1.9 trillion spending bill last year (without a single Republican vote). They waged a war on fossil fuels that helped spark oil shortages and pain at the pump.
And they did practically nothing as crises in the supply chain helped produce empty shelves and higher prices all around. (Heck, the shortage of infant formula is resident getting worse.)
The Fed, for most of the past year, hasn’t helped the White House lie that inflation (now in the 14th consecutive month at more than 5%) will be “temporary,” keeping interest rates and money supply inflated. Now quick to catch up, late rates rose by half a point in May and three quarters in June (the most since 1994!); This week’s rise could be a full percentage point. (It also shrinks the money supply.)
Again, Fed action is necessary—but raising interest rates was only part of the formula President Ronald Reagan used to end stagflation when he took office from Carter: He’s also begun to rein in Uncle Sam’s spending, to stimulate growth, and to cut tax rates. The Board of Directors and the Rollback of Federal Regulations—Three Steps Biden and his party have rejected outright.
Indeed, the administration is burdening the economy with a host of new regulations, from its war on carbon fuels to pro-union rules to “diversity” mandates, while Senator Chuck Schumer and Speaker Nancy Pelosi continue to find new ways to spend and strive to pass new tax increases.
The nation is suffering from hyperinflation, with high unemployment and stagnation, yet Democrats continue to fan the flames. And while voters are likely to change Congress this fall, it isn’t until 2024 that they can give Biden the treatment of Jimmy Carter and make him a one-term president.