The 1970s was racked by what came to be known as “stagflation”—the simultaneous existence of high inflation, repeated recessions, and low economic growth. Driven by high taxes, excess money creation to monetize massive federal spending, and massive government regulation, stagflation endured from the late 1960s to the early 1980s. It didn’t end until a major change in federal economic policy took hold.
Inflation, properly understood, is an economy-wide scourge consisting of “too much money chasing too few goods.” A spike in the price of some particular good or service due to supply chain disruptions—such as the spike in gasoline prices in the months following Hurricane Katrina, which disrupted oil production in the Gulf—is not inflation. Inflation permeates every nook and cranny of the economy.
After years of stagflation, a new idea began to take hold in the late 1970s among many economists. And the idea led to a major new economic policy direction.
That policy change came to be known as supply-side economics. That policy, embraced and implemented by the Reagan Administration, consisted of a three-pronged strategy; reigning in the money supply by the Federal Reserve, dramatic cuts in personal income tax rates, and widespread deregulation (deregulation actually began under the Carter Administration). Increasing the supply of goods by incentivizing production while cutting the money supply, the theory held, would bring supply and demand into balance, ending inflation while spurring economic growth.
The results were astounding. A massive job- and innovation-filled economic expansion took hold, with GDP growth of 8% growth out of the box, and 4% average GDP growth from 1983 through the end of the century. And that powerful expansion was accompanied by a phenomenon that was thought impossible by the prevailing 1970s logic of Phillips Curve economics: The strong expansion was accompanied simultaneously by falling inflation (12.5% to 3,4%), falling interest rates (19% to 8%), and falling unemployment (10.8% to 3.9%).
Which brings us to today. For the first time since the 1970s, America is facing massive inflation. Will it degenerate into a long-term stagflation? Already, economic growth for the past 20 years has been half the 1980 - 2000 period, thanks largely to increasing regulation and government interference into the economy. Now that weak growth is joined by rampant inflation.
The political signs don’t look good. Unlike the late 1970s/early 1980s, which saw a major shift away from regulation and taxes, the current Washington policy features increased calls for regulation, especially through antitrust law and restrictions on energy production, and calls for increased taxes on producers. The Fed is attempting to reign in the money supply, but it seems to be well behind the inflation curve, now in the 8 - 10% range.
Furthermore, as the New York Times observed in The Painful Path, the government’s plan to fight inflation could cost jobs and restrict wage growth. Meaning, it’s back to the Phillips Curve, which holds that to lower inflation one must slow economic growth and raise unemployment. Have the lessons taught by supply-side economics already been lost. The times observes:
The country’s main tool for fighting price increases is Federal Reserve policy. The Fed is trying to bring inflation back under control by raising interest rates, which sets off an economy-cooling chain reaction. Higher interest rates increase the cost of mortgages and company borrowing, which slows business growth and translates into less hiring. As the job market weakens, paycheck growth slows, which further tamps down buying. Less shopping gives supply a chance to catch up.
So the Times acknowledges that the supply side of the equation has to “catch up.” But how? The Times observes:
Fed policy works on the demand side of that equation. When fewer people shop for cars, because auto loans are expensive and the job market feels less secure, a smaller supply of vehicles might be enough to go around without causing prices to shoot up.
But crushing demand ranks somewhere between unpleasant and agonizing. When the Fed pushed interest rates to double-digit levels in the early 1980s, in an effort to bring down rapid inflation, it set off brutal back-to-back recessions that pushed the unemployment rate to nearly 11 percent. (Right now, the rate is at a historically low 3.6 percent.)
That grim historical example has prompted some labor-focused groups to call for a more holistic response to today’s price increases, which are the result of both strong demand and disrupted supply.
The White House and Congress could help to ramp up production in key parts of the economy, offering relief on the supply side of the inflation equation. [my emphasis]
And there-in lies the rub. The Biden Administration is to “help to ramp up production in key parts of the economy,” which to it means choosing cronyism, especially for its concept of “key parts” like unreliable renewable energy and electric vehicles and various “build-in-America” strategies. Whereas Reagan simply sought to get the government the hell out of the way and let productive innovative citizens rip, Biden wants to disincentivize production by selectively “helping” favored constituents. It calls for increased taxes on the most profitable corporations, while pursuing increased antitrust enforcement against the most successful businesses and an anti-merger fever that stifles innovation.
I like that the New York Times is mentioning the supply side. But the Times is calling for the supply side of the equation to be “helped” by more government, when what it really needs is less government and more freedom. As Reagan understood, and today’s leadership doesn’t, the driving force of economic growth is the individual’s pursuit of personal gain and happiness. Government policies that favor some and not others, or redistribute wealth from one pocket to deposit it in another, does not and can not cause growth. Only increasing incentives like reducing taxes (including inflationary government spending) and economic regulation can leave individuals freer to pursue more productive goals. The only way to “help” the supply side is to reduce government involvement. The direction we are currently heading is in the direction of a repeat of the 1960s and 1970s, when inflation came in wave after wave in an ever higher trend, rather than the 1980s and 1990s, when that pattern was broken amid powerful growth.
Related Reading:
"Trickle-Down Economics": Anti-Capitalists' Insulting Portrayal of the "Common Man"
Jeb Bush’s Tax Plan, Hoover, and Reagan
Three Cheers for "Trickle-Down!"
Why a Government Can't "Stimulate" an Economy
Jimmy Carter Sparked a Craft Beer Explosion by Getting Government Out of the Way
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