While President Joe Biden was focused on being his best European/Russia-pleasing preener at the G-7 and Vice President Kamala Harris embarrassed herself in Central America, here at home Americans are suffering the beginning of wild inflationary conditions not seen since the 1970s.
Our country is in crisis. Adding to a dangerous rise in criminal behavior across the nation and especially at our southern border, our economy is adrift. As we move out from under the destructive lockdowns owed to the pandemic, this should be a time of optimism and hopefulness. Instead, many industries are sputtering to re-open as inflation is “stealing” from returning working American’s paychecks, trading economic joy for malaise. Even the stock markets are recognizing the dangers and are beginning to readjust the prices of assets.
Super-charged inflationary pressures continued to gain momentum according to a survey by the Philadelphia Fed this month, adding to alarming price jumps recorded in April. Eighty-two percent of manufacturing companies in the recent Philly Fed’s survey reported paying higher prices for the inputs of their products, while just one percent said costs had fallen. As a result, the diffusion index (a metric of manufacturing activity and costs) moved up four points to 80.7, the highest reading since June 1979.
But what if the Fed continues to incorrectly apply misguided inflationary policies at this critical moment? They typically get inflation “wrong” because they misdiagnose the cause for alarming increases in prices: printing too much money. The danger is revealed in the Fed’s policies to date which will exacerbate, not retard, inflation for the immediate and longer-range future.
Nobel Laureate Milton Friedman observed that inflation is always and everywhere a monetary phenomenon and that even without the gold standard there were inherent limits to printing more money. The fundamental rule is the supply of money must be equal to the demand for money. But the demand for money is a slippery concept: it’s natural but dangerous to operate under the notion that the demand for money is endless. It’s anything but.
Simply put, too much money produces inflation, as Friedman consistently understood. While inflation involves a general increase in the price level, deflation involves a general decline in the price level. There is a rule of thumb to guide this macro-monetary policy: the Price Rule. Under this precept, the Fed follows the most sensitive prices in the marketplace, generally a basket of roughly 25 commodities. The fundamental problem is that monetary policy has long lag times, (about two years, Friedman estimated in the 1970s). Without advance notice about whether monetary policy was too loose or too tight, it would generally be too late to reverse course once inflation showed up in the CPI.
Inflation is also often and fundamentally described as too much money chasing too few goods. This reflects both the supply side as well as the demand side of inflation. When workers are not working, as we are witnessing in today’s labor markets, supply is constrained contributing to more inflationary pressures.
The obvious prescription to our current condition is well defined in our past. In the 1970’s the monetary policy direction mirrored today’s wild spending and devalued dollar. We must caution against the Federal Reserve making the same mistakes today. Moreover, our current administration’s penchant for even more outrageous stimulus spending is a recipe for disaster.
America has seen this movie before. Weak Presidential leadership, as examined from Watergate until the inauguration of Ronald Reagan, was filled with one failed economic decision after another, creating an inflationary disaster Americans suffered under for most of the decade of the 1970s and a bit beyond. We are once again witnessing a similar script.
Joe Biden, clearly over his head in Europe, has left the important task of managing the economy to a misguided Federal Reserve and to his party’s far-left leadership in Congress who are continuing to spend us off the inflationary cliff. Adding a $6 trillion infrastructure plan to an already over-loaded national debt — currently approaching $30 trillion — can lead us nowhere but to runaway inflation. Beyond the horrible damage that will do to our nation’s working middle-class, the real worry is how to return us to proper economic growth conditions under this enormous debt thundercloud.
Rather than leave important economic policy to Congress and the Fed, Biden needs to find the critical courage to implement sound policies to avert what is certain to be a scary, uncontrollable inflation freight train that will derail his legacy along with the country’s economic prosperity and future fiscal health.
Lew Uhler is founder and chairman of the National Tax Limitation Committee and the National Tax Limitation Foundation (NTLF). Uhler was a contemporary and collaborator with Ronald Reagan and Milton Friedman in California and across the country.
Peter Ferrara served as a member of the White House Office of Policy Development under President Reagan, Associate Deputy Attorney General of the United States under President George H.W. Bush, and the Dunn Liberty Fellow in Economics at the King’s College in New York.
Joe Yocca is NTLF’s policy director. A long-time political and policy consultant, Joe served in the California State Senate as chief of staff to the Republican leadership for decades, and directed numerous statewide legislative and congressional campaigns throughout his career.