By Kevin D. Williamson
Sunday, January 02, 2022
Happy New Year. About last night . . .
We have, in a way, been here before. The Covid-19
epidemic and the federal response follow a familiar pattern: A crisis emerges,
extraordinary action is taken, that extraordinary action acquires interest
groups who wish to see it become ordinary action, economic troubles inevitably
follow, and sorting it all out gets pretty hairy pretty quickly.
Sometimes, this doesn’t go too badly. Consider the end of
World War I, when many progressives desired to keep Woodrow Wilson’s “war
socialism” as a permanent practice, giving the federal government broad
managerial powers over both the economy and civil society. Washington had got
itself a taste of real autocratic power, and wanted more. (Jonah Goldberg
describes this seduction very intelligently in Liberal Fascism.)
But Americans had had enough of it, and Warren G. Harding put a stop to it with
his “Return to Normalcy.” But it wasn’t easy: The U.S. inflation rate had been
above 17 percent during the war, and it was still above 15 percent in 1920. But
as the United States transitioned from a war economy to a peace economy, there
ensued a great deflationary recession, with the high wartime inflation being
followed by steep deflation — of nearly 11 percent — in 1921. Discharged
soldiers went looking for work in a flooded market, with wages stagnating or
declining. The medicine was bitter — in 1921, defense spending was cut by a
third and overall federal spending was reduced by 7 percent — but it largely
worked, and the rest of the 1920s turned out to be famously prosperous.
The end of World War II came with some economic trouble,
too: Dwight Eisenhower was as much of a return-to-normalcy guy as the country
could have hoped for — he personified normalcy — but these transitions are
never without agony, and the 1958 recession was a serious one.
Lyndon Johnson flooded the economy with money thanks to
his two wars — the more expensive one in Vietnam and the less expensive (at the
time) one against poverty — which helped to cause the painful inflation that
persisted throughout the 1970s and into the first years of Ronald Reagan’s
presidency. Reagan had the good sense and patriotism to take a political hit
and stick with Paul Volcker’s painful anti-inflation program, and it drove his
approval numbers lower than a snake’s belly in a wagon rut. If not for Reagan’s
great political skill — and the roaring recovery — pursuing an intelligent
anti-inflation policy might have ended his presidency.
Emergency. Emergency spending. Inflation. Recession.
Recovery. The pattern is not difficult to discern.
Because our current tribal rage causes us to see
everything in the dumbest possible binary terms, it is sometimes difficult to
make the case that Covid-19 was a genuine crisis, that it required an
extraordinary response, and that, at the same time, the crisis has been
exaggerated, the response has overreached and over-persisted, and that an
unpleasant process, something like the economic version of drug withdrawal, is
now necessary.
The political problem is partly self-correcting. The
Covid-19 spending measures were popular because spending is popular
categorically. The people who were receiving supplemented and extended
unemployment benefits were in themselves a highly motivated constituency
working to secure their own benefits. But now that all that spending is
supercharging inflation, the wage gains of the past few years are being reversed or
entirely erased for many workers, especially those in lower-wage jobs.
By some recent measures, real wages — meaning wages adjusted
for inflation — are down year-over-year for lower-wage workers. Current
policies are, in a measurable way, hurting the people they are meant to help.
This punishes everybody: U.S. productivity has just suffered its biggest decline since
1960.
There is no easy fix. The usual way to put a brake on
inflation is to raise interest rates. That is a hard thing to do for the U.S.
government, which is the most indebted organization in world history and
already spends a substantial share of each year’s tax revenue on interest
payments for prior years’ spending. Both the government and the broader economy
have become very accustomed to ultra-low interest rates — free money, in effect
— and both will have a tough time adapting to a different credit environment.
Prosperity will emerge — if we let it. But first, we have
to do the hard part: reforming our public finances with an eye toward long-term
stability and following a more sensible long-term monetary policy, thereby
creating the conditions of stability and predictability in which sensible and
profitable long-term investment is possible.
The hangover is coming. That’s the bad news. The good
news is that hangovers end.
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