Inflation in the United States causing concern for business at all levels
It did not necessitate great insight to foresee the spate of inflation coming down the pike, but apparently many missed it. Now standing at 8.6%, up from less than 2% two years ago, general price increases have been precipitous.
The seeds of our current inflation were initially sown when, in the weeks following the election, advisors to the president-elect voiced concerns about a slow recovery from the pandemic. They expressed fears that significant stimulus spending already in place might produce an anemic economic recovery like the one that followed the 2009 Great Recession.
They also noted that because interest rates were so low that the cost of more government borrowing for stimulus purposes would be cheap. This advice placed the autonomous Fed in a potentially precarious position because it had an incentive to maintain low interest rates despite pending signs of inflation.
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The result of this concern was a new expenditure proposal quickly called what came to be known as the American Rescue Plan. The $1.9 trillion plan was buttressed by the desire of the Biden administration to reverse the Trump-era policies that had relied on tax cuts rather than government spending to stimulate economic growth.
Among many other provisions of the American Rescue Plan were direct payments of $1,400 to Americans on a sliding scale based on their income. It also expanded the $300 unemployment payments for six months. It allocated $130 billion to K-12 education, $40 billion to colleges and universities and added additional funding to the previously distributed stimulus dollars allocated to small businesses.
Some economists, such as former Treasury Secretary Larry Summers and Oliver Blanchard, the then-former chief economist of the International Monetary Fund, and Michael Strain of the American Enterprise Institute believed that the American Rescue Plan had the potential to overheat the economy and initiate a general price rise we see today.
The new Treasury secretary, Janet Yellen, saw the wisdom of their caution. However, the exuberance of the new administration, anxious to capitalize on the election momentum and push for progressive economic policies, won out and the plan was passed in March 2021.
These expenditures were being made even though unemployment was declining and “supply side” problems were already evident. The potential for inflation was obvious and an increasing number of economists and business leaders were sounding a word of caution. Many pointed out that increased spending, coupled with the Fed’s loose monetary policy, which kept rates low thereby expanding the nation’s money supply, were the precursors of inflation.
The inflation we see today is already causing concern among American business at all levels and portends problems for the economy. A recent survey by the 350,000 member National Federation of Independent Business showed that 54% have a negative view of the economy going forward. And a survey of the CEOs of Fortune 500 companies, by the Business Roundtable, found that their view of the American economy is at its lowest point in 54 years.
Today we face an annual 8.6% inflation rate, and a very real concern about an economic slowdown. Together these trends represent a formula for stagflation
The Fed can play a role in reducing inflation, but even with a 0.75% increase prime rate we still have a long way to go. Washington must come to understand that spending our way out of inflation has not worked in the past and is not working now.
America is in for a rough ride. Weaning ourselves from what has proved to be too much largesse on the part of government will be difficult enough. Doing so at a time when interest rates are rising will make the task even more difficult.
As a country we need to learn that when politics holds sway over sound economic reasoning, we will literally and figuratively pay a high price.
Michael A. MacDowell is president emeritus of Misericordia University and a director of the Calvin K. Kazanjian Economics Foundation. He lives in Estero.
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This article originally appeared on Fort Myers News-Press: Michael MacDowell: Inflation causing concern for business at all levels
