An Economic Stew

by Nick Stone of Drawnlines Politics.

In Reagan's acceptance speech in front of the Republican National Convention in Detroit in 1980, he spoke of the economic situation he would inherit from then-President Jimmy Carter. The situation then was strikingly similar to today. Reagan rightly said:

"The first Republican president once said, "While the people retain their virtue and their vigilance, no administration by any extreme of wickedness or folly can seriously injure the government in the short space of four years."

If Mr. Lincoln could see what's happened in these last three-and-a-half years, he might hedge a little on that statement. But, with the virtues that our legacy as a free people and with the vigilance that sustains liberty, we still have time to use our renewed compact to overcome the injuries that have been done to America these past three-and-a-half years.

First, we must overcome something the present administration has cooked up: a new and altogether indigestible economic stew, one part inflation, one part high unemployment, one part recession, one part runaway taxes, one party deficit spending and seasoned by an energy crisis. It's an economic stew that has turned the national stomach.

Ours are not problems of abstract economic theory. Those are problems of flesh and blood; problems that cause pain and destroy the moral fiber of real people who should not suffer the further indignity of being told by the government that it is all somehow their fault. We do not have inflation because -- as Mr. Carter says -- we have lived too well.

The head of a government which has utterly refused to live within its means and which has, in the last few days, told us that this year's deficit will be $60 billion, dares to point the finger of blame at business and labor, both of which have been engaged in a losing struggle just trying to stay even.

High taxes, we are told, are somehow good for us, as if, when government spends our money it isn't inflationary, but when we spend it, it is."

Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time. Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable. Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets; together, these factors can cause stagflation. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral.

John Maynard Keynes wrote in The Economic Consequences of the Peace that governments printing money and using price controls were causing a combination of inflation and economic stagnation in Europe after World War I.

So let us ask ourselves: Is there any reason to fear that we might relive the Carter years of stagflation in the near future? Some economists and policy analysts are beginning to speak out. The proof may once more be in the pudding.

Financial Analyst Joseph Lazzaro points to the recent run-up in oil and commodity prices as a possible trigger. Lazzaro suggests, "...on a cyclical basis, oil has repeatedly increased inflation in the U.S. and caused recessions." He adds, "Today, in 2009, increases in the price of commodities (gold, copper, coal) threaten a new round of cost increases for the U.S. economy despite a 9.4% unemployment rate and a pronounced recession that will easily exceed 18 months in length. Those price increases further cut Americans' disposable income, and represent yet another impediment to increasing aggregate demand -- something the U.S. economy sorely needs."

Economist Nouriel Roubini also recently warned of yellow weeds where others see green shoots in our economy, and warned that 1970's style inflation may be on the way.

Most alarmingly, Sunday's Washington Times featured an article by policy analysts David R Burton and Cesar Conda which outlined the blueprint that they assure led us to inevitable stagflation.

They assert:

"An economic train wreck is coming. Its cause is simple and straightforward: the breathtakingly bad monetary and fiscal policy during the past six to nine months - in other words, too much money and too much federal spending.


The first thing policymakers need to do is to stop doing harm. The Fed needs to immediately raise the federal funds target interest rate and slow money growth to normal levels. Congress needs to return federal spending to a more normal 19 percent to 23 percent of gross domestic product. It should reduce the U.S. corporate tax rate, currently the second-highest rate among industrialized nations, and, if possible, reform the tax system to promote work, savings and investment. Finally, it needs to control rather than exacerbate federal entitlement spending.


Instead, the Obama administration seems bent on doubling down and making a bad situation even worse with massive increases in business and individual taxes, nationalizing or taking control of major industries (including automakers, banks, insurance and health care), hidden but huge energy-cost increases in pursuit of the chimera of global warming and ever greater entitlement spending."

Posted by Nick Stone on 7:17 AM. Filed under . You can follow any responses to this entry through the RSS 2.0