For most of 2020, the United States has experienced persistent, high inflation. The Biden administration has pivoted from denying the reality to saying it was merely transitory to even praising aspects of this period of high inflation.
Now, the Biden White House will need to work on some new talking points, because inflation threatens a new stage: stagflation.
There are two quick ways to define stagflation. The first definition, if you were around in the 1970s, is more recognizable. In the words of Investopedia, it’s “characterized by slow economic growth and relatively high unemployment — or economic stagnation — which is at the same time accompanied by rising prices (i.e. inflation).” That definition describes former President Jimmy Carter’s entire administration, leading him to give his infamous “malaise” speech.
The second definition is where we are teetering at the moment. An alternate definition of stagnation describes it as a “period of inflation combined with a decline in the gross domestic product (GDP).”
We only recently received the data on this second definition. The third-quarter GDP report for the United States showed a dramatic slow down from 6.7% growth in the second quarter to a paltry 2.0% growth in the third quarter. Meanwhile, inflation in the United States has remained at 5% or above since May 2021, giving us half a year of rapid inflation impacting every corner of the economy.
Prices are increasing for everyone, while growth is slowing. That’s a toxic mix. We only have enough data for one quarter of the year so far, but at this stage, it’s hard to imagine the trendlines changing for the end of December. High prices and slow growth present a troubling economic situation.
You don’t have to take my word for this, either; take the word of Obama administration economic adviser Lawrence Summers. He criticized Treasury Secretary Janet Yellen for claiming that inflation was slowing down and things were fine. In a series of tweets, he explained that he hoped Yellen was right, but that the data indicated that hope was unlikely.
Summers pointedly said: “When the Administration formulated its budget in February, it expected 2 percent inflation in 2021, I was warning about inflation. Their forecast is no longer operative.”
Lawrence Summers is correct; there’s no way first of the year projections or budgets are operative. We were emerging from a global pandemic with vaccines getting spread around the country. The idea that you could confidently predict where things would be in January is utterly absurd. Recognizing that is not failure; it’s wisdom.
Grocery stores are struggling to keep shelves full, dealing with supply-chain shortages and increasing costs on every aisle. Inflation is increasing oil prices on a monthly basis, making energy cost everyone more.
The Wall Street Journal notes we’re getting close to a persistent cycle of high inflation: “At first blush, this looks like the start of a process where wages push up prices, which then prompt employees to ask for, and receive, higher wages. That sort of wage-price spiral has historically been a key ingredient in persistently high inflation.”
We don’t have the data to say that just yet, but the trendlines are not promising. The other problem: The legislation pursued by the Biden administration in Congress will not alleviate the issues. The Wall Street Journal‘s editorial board argues:
Nothing in the Administration’s Build Back Better plan is pro-growth (see nearby). The welfare and entitlement spending will deter work, while the tax increases will reduce incentives. Certain industries like green energy will get a subsidy lift, but the risk to the broader economy is misallocated investment.
None of this suggests a recession given the inevitable recovery from the pandemic lockdowns. But the tragedy is that the expansion would be so much faster, and so much better for so many more people, if the Biden Administration had done nothing at all.
The Biden administration has put a lot of effort into saying they are monitoring the situation and on top of things. There’s precious little evidence that’s true.
You could give them some slack with the pandemic impact shifting over the last few months; it’s hard to predict anything when everything is unknown. But inflation has been a steady drumbeat for months.
We now have slow, anemic growth to accompany that inflation, with few signs these things will diminish. Maybe the economy gets a boost from the fourth quarter’s Christmas and other holiday spending. But supply-chain issues could prevent that spending from providing the boost we need, too.
Stagflation is here. Whether it’s an issue that stays, like high inflation, depends wholly on economic growth.
The Biden White House, along with Janet Yellen and Lawrence Summers, is hoping for the best. I hope they get what they wish for, because they’ve been wrong every step of the way so far this year.