Stagflation by Any Other Name

National Review Online

Friday, July 29, 2022

 

It is almost comical how much work the Biden administration is putting into denying that the U.S. economy has entered a recession.

 

Here is what is not in dispute:

 

One, real GDP is contracting and appears to have been for half a year now. Two consecutive quarters of GDP contraction is the commonly accepted definition of a recession when there is a Republican incumbent facing reelection; when Democrats are in danger of a midterm wipeout, “recession” becomes a term of art. The Biden administration has really been trying to work the National Bureau of Economic Research, who are the guys who will decide whether to call the recession a recession. Meanwhile, Janet Yellen is out there like Baghdad Bob, insisting that this can’t be a recession because the labor market is strong and because “household finances remain strong.”

 

Two, the labor market isn’t actually strong. If the labor market were strong, then real wages would be going up, and the number of jobs would have recovered to its pre-Covid level. Neither of those things has happened. In fact, real wages are going down, not up. Which is to say, Americans are working more hours for less pay — hardly the sign of a good jobs market. And the declining real GDP means that Americans are doing more work but producing less value. And as for those “strong” household finances . . .

 

Three, inflation is currently at 9.1 percent, meaning that those “strong” household finances are experiencing something just short of literal decimation. The inflation rate for food is more than 10 percent, and the inflation rate for energy is 41 percent.

 

Four, declining GDP and high inflation, or “stagflation,” as it was known in the 1970s, is something the U.S. economy has not experienced since Jimmy Carter’s grim mug was on the cathode-tube television while Walter Cronkite read the news.

 

Also: Do you know what will not make inflation better? A great big injection of more money into the markets with a $369 billion “Inflation Reduction Act” — which, ridiculously enough, is what Senate Democrats are calling their latest “deal.”

 

The situation is in some ways even worse than it looks at first glance. The growth of nominal wages in 2022 (meaning wages not adjusted for inflation) has been very modest, and, in fact, it has been even slower than it was in 2021, while inflation in 2022 has been more rapid than in 2021. Put another way: Prices are increasing about twice as fast as wages. The fact that this is happening while the unemployment rate is relatively low is not a great sign in that it suggests wages may be stuck on their current sorry trajectory for some time. When you have a tight labor market, and real wages are headed lower rather than higher, you have an economic problem that probably is not going to be solved by an even tighter job market.

 

Is it a recession or not? Whatever the NBER calls it, it’s 9.1 percent inflation, declining real incomes, and declining economic output. Professor Pangloss himself couldn’t spin that into good news.