Gordon L. Weil
The political campaign focuses on inflation. Somebody must be held responsible for high prices and even for a recession that hasn’t happened.
Economic conditions could always be better. But right now, things may be better than they seem. And they’re surely different.
First, some good news. The U.S. is the world economic superpower with the world’s leading currency. When times get tough, people want the dollar.
A strong dollar cuts the cost of imports, benefitting our consumer-based economy. But it boosts the price of American exports. That’s somewhat masked by rising prices worldwide, thanks to shortages and supply chain glitches. And higher revenues bring new profits to some industries, like oil.
The glory days of American industrial production began to fade in the 1970s. Now, in the wake of the Covid recession, manufacturing is again growing at the pace of 50 years ago. More people work in factories now than before the virus struck.
Compared to other major economic powers, the U.S. is doing better. China has a Covid problem. Europe and Brexited Britain face major fuel price increases and struggle with shortages, high inflation and reduced industrial output. Then, there’s Russia!
We keep expecting unemployment to increase as the Federal Reserve raises interest rates in hopes of reducing inflation. But the Fed’s moves have not yet caused joblessness, which remains low.
Higher interest rates raise costs, but the situation may not be as bad as we think. The Fed is bringing rates up to a level that used to be called normal. For more than decade, they have been historically low and we grew used to it.
Contrary to the usual mantra, the biggest help has come from the federal government. To deal with the effects of Covid, the need to renew basic infrastructure, the climate crisis and bringing production back from abroad, the Biden administration and Congress have pumped trillions of stimulus dollars into the economy. It worked.
The result is record high government debt. That may have been acceptable when interest rates were low, but paying it down later could hurt. But that’s left by both political parties for another day or generation.
If everything is so good, why don’t people feel better?
In this country, the answer is clearly that the prices of essentials – food and fuel – are much higher than they were. Inflation takes place when too much money chases after too few goods. That’s exactly what happened.
Two causes drive these price increases: Covid-19 and Russia. The virus brought a recession when millions lost their jobs or faced cutbacks. Some workers chose not to come back after vaccinations were developed. Workers stepped up demands for better pay. Production could not keep up with normal demand.
Russia’s unexpected and disastrous land war in Ukraine led to inevitable disruptions in the world’s supply of oil and grains. Russia used oil as a weapon to force its customers to accept its invasion, but the customers have resisted, pushing up the price of gasoline worldwide. It cut grain exports from Ukraine, increasing the cost of wheat and other grains.
These causes contributed to uncertainty, which can cause the economy to hunker down. The British decision to quit the EU was followed by its relatively sudden fall from the top ranks of the world economy. Recently, that has added to uncertainty.
It falls to central banks like the Fed to manage policies that would combat inflation while trying not to overdo it and end up with a recession. The uncertainty about their chances of success adds more doubt.
Although the economy seems to emerge as the major issue for many voters, no election result – keeping the Democrats in charge or turning the veto over to the Republicans – will change much. The problems are not merely a short-term matter of national politics.
The world economy may be entering an historic transformation, almost at the level of the Industrial Revolution or the growth of social welfare like Social Security, each about a century apart. After another century, we may be turning a new corner.
Technology with growing artificial intelligence, remote work, a more educated workforce, tax policy and deficit spending, trade and the new demands on the domestic economy will likely drive major change. It will never be the same.
It’s possible that prices will never settle back to levels below where they are now. Workers have forced a new minimum wage without government action. Bringing production home from China, a sound policy, will cost more. Dealing with climate change carries its own price tag.
Such changes cannot be reversed by this year’s congressional elections. Economic reality in the U.S. and across the world will impose itself on us. No president or Congress can change that, but they must now try to make the best of the new emerging economy.
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