According to a recent CNBC survey, pessimism regarding the American economy is at an all-time high, with 69% of the public having a negative view.  The leading reason is inflation in a weak economy. The latest report this week shows that inflation remains persistently high at near 5%, eroding slower-growing average weekly earnings year-over-year for 25 straight months.

The Federal Reserve recently raised its federal funds rate target for the 10th meeting in a row to 5.25%–the highest since August 2007. While these rate hikes were anticipated in light of ongoing inflation, they could have been avoided. But excessive government spending and money printing during the “boom” led to this government-failure bust, the effects of which we’ll feel for months and even years to come.
​
The sluggish economic growth has been rough on Americans, but inflation has been a killer. The survey also noted, “Just 5% say their household income is growing faster than inflation, 26% say it’s keeping pace, and 67% report they are falling behind.” This is devastating lower-income households’ standard of living. 

The trend of declining real wages is particularly harmful to low-income Americans. But even the wealthy feel the effects, as more than half of higher-income Americans surveyed report spending less on eating out and entertainment. This has contributed to the anemic annualized economic growth of just 1.1% in the first quarter of 2023 after rising by only 0.9% from the fourth quarter of 2021 to the fourth quarter of 2022. 

As prices increase, businesses spend more on production, making it more difficult to raise workers’ wages while remaining profitable. Employees who can’t be paid enough to fund costly goods like childcare and groceries, which have risen by 7.1% over the last year, spend less on other things or fall behind on their bills. Businesses earning less revenue will invest less, and so goes the vicious downward cycle. 

Another hit on Americans has been the cost of shelter, which was up 8.1% over the last year even as there are signs that housing prices are cooling across the country. Still, housing prices have been “eclipsing the inflation rate by 150% since 1970.” This means many Americans can’t afford to own a home, and that’s getting further out of reach as mortgage rates have soared. 

What’s to be done about inflation threatening Americans’ livelihoods? Legendary economist Milton Friedman had some advice about addressing sky-rocketing inflation that is valuable today. 

There is one and only one basic cause of inflation: too high a rate of growth in the quantity of money—too much money chasing the available supply of goods and services,” he argues. “These days, that cause is produced in Washington, proximately, by the Federal Reserve System, which determines what happens to the quantity of money; ultimately, by the political and other pressures impinging on the System, of which the most important are the pressures to create money in order to pay for exploding Federal spending and in order to promote the goal of ‘full employment.’

Despite raising its target interest rate to fight inflation, the Fed has a bloated balance sheet of nearly $9 trillion, which is too high for disinflation to its target of an average 2% rate. When the Fed engages in excessive money printing compared with the supply of goods and services, inflation is the result, as Friedman described. 

While it was appropriate for the Fed to raise its target rate, the ongoing increase to its balance sheet is just continuing to distort productive economic activity. And Congress must restrain spending. The national debt is nearly $31.5 trillion, with net interest payments on the debt set to exceed $1 trillion soon. 

The government must borrow to finance the deficit when it spends more than it makes, driving up interest rates. Higher interest rates increase the cost of borrowing for businesses, leading to lower investment, which reduces the supply of goods and services. Add in the Fed buying the debt that increases the money supply with less supply of goods and services, resulting in more inflation. 

House Republicans passed a debt ceiling bill that would return spending to 2022 levels and limit spending to just 1% growth over the next decade while eliminating other bad policies. Negotiations between the two parties continue, while a June 1 deadline looms. If they don’t reach agreement, it will make the debt issue an ongoing concern as defaulting on the debt nears, further raising interest rates that weaken the economy. 

This means we can expect a deeper, longer recession. The Fed and Congress have a duty to stop flawed policies of excessive printing and spending, respectively. High inflation harms Americans, and the Fed and Congress must address this. If they don’t take action soon to address these government failures, the erosion of the American dream will continue.

The future of America depends on sound, pro-growth, pro-liberty policies instead that will let people prosper.

Originally published at Econlib.

​In today's new episode of the "Let People Prosper" podcast, I'm thankful to be joined by Dr. Chuck Beauchamp for a thought-provoking discussion on new inflation numbers and the current economy.

​We discuss:
1) The newest inflation numbers and how the rate is impacting various markets including food, housing, and energy;
2) Interest rates' impact on the housing market and the crisis of affordability; and
3) Why the U.S. dollar's status could continue to wane and more.

You can watch this interview on YouTube or listen to it on Apple Podcast, Spotify, Google Podcast, or Anchor (please share, subscribe, like, and leave a 5-star rating).

​Chuck’s bio:

• Dr. Charles "Chuck" Beauchamp is an Associate Professor of Finance in the School of Business at Mississippi College. Dr. Beauchamp joined MC’s faculty in 2016 and currently teaches Business Finance, Financial Modeling, and Financial Markets.
• His areas of expertise are working capital, business & corporate lifecycles, and how monetary policies affect corporate decision making.
• He is a contributing fellow for the Mississippi Center for Public Policy.

Find show notes, thoughtful economic insights, media interviews, speeches, blog posts, research, and more here at my website (https://www.vanceginn.com/) or Substack newsletter (https://vanceginn.substack.com). Please subscribe to the newsletter, share it with your friends and family, and leave me a comment.

The U.S. dollar will likely soon lose its status as the global reserve currency. The dollar’s global reserve dominance has declined in recent years. As a result,  international trade partners are hedging new connections. This will restructure the global economic order and create challenges ahead, especially for middle-class Americans.

Americans should know what’s happening and how they can prepare for this possibility. But first, what does it mean to be the world’s global reserve currency, and why does it matter? 

The U.S. Dollar is the dominant global reserve currency. It’s widely accepted and is the preferred medium of exchange for international transactions. The dollar has enjoyed this status for the past 80 years due to its strong reputation acquired across a long history of America’s rising military prowess, fulfilling its financial obligations, and maintaining a strong economy.

These institutional foundations of the dollar created high demand among foreign entities. One of the most important transactions utilizing the dollar is the purchase of oil. Oil is currently priced in dollars globally and other dollar-denominated assets. Losing or weakening the dollar’s position and value results in higher oil prices. 

The dollar’s elevated demand has helped keep its value high relative to other currencies. This prompted many countries to tie their currency directly to our dollar. The U.S. benefited by leveraging foreign demand for dollars into loans to the U.S. federal government. Foreign investors lend the U.S. high volumes of money because of the debt’s dollar denomination. 

The higher demand for U.S. Treasury securities pushes down domestic interest rates. This influences lower rates on mortgages and business loans, which help provide increased investment and economic growth. Losing or weakening the dollar’s reserve position will result in increased interest rates, decreased investment, and weak to negative economic growth. 

The dollar’s reserve status has also meant an increased volume of international trade. Ultimately, international trade helps keep interest rates and inflation moderately low. Losing or weakening the dollar’s reserve position will result in increased inflation. 

Trouble for the dollar is on the horizon. 

The once-givens about the dollar have come into question recently due prominently to excessive deficit spending. Foreign investors are reducing their demand for dollars as they diversify their portfolios. This combination contributed to the ballooning of the debt, depreciated the dollar, led to higher inflation and falling year-over-year real average weekly earnings for 25 straight months, and drove up interest rates, thereby slowing economic activity. 

Of course, this will have tradeoffs and many of them won’t be good.

As mentioned, the major tradeoffs will be higher inflation and interest rates. The latter will trigger a move by the Federal Reserve to attempt to lower interest rates. But if its target rate is held below what markets dictate, the Fed will monetize the debt, increase the money supply, and drive inflation higher. The long-term result will be even higher interest rates to tame inflation.

Unfortunately, the consequences of higher interest rates and inflation would be severe. People should expect higher mortgage rates than the already rising average rate of 6.4%. This is the highest in 15 years. Ultimately, higher interest rates would result in a steeper contraction in the housing market, exacerbate economic weakness, increase job losses, and worsen poverty.

But maybe more importantly, it would likely crush middle-class Americans and the lifestyle that they’ve been accustomed to having for decades. The higher cost of shelter, food, gasoline, and energy as the dollar loses its reserve currency status would wreck havoc on their budgets and force major decisions about what’s best for their families. This could mean having to put off saving for college, going on vacations, and living in much smaller homes. 

All because our government couldn’t spend our money wisely. Therefore, the government should take serious steps to restore confidence in the dollar before a bad situation for Americans becomes worse or irreconcilable.

To start, the federal government should reduce deficit spending. The long-term goal should be a balanced budget and an eventual start to paying down the debt. This will be pro-growth as the government stops redistributing taxpayer money from productive to unproductive activities. It will also strengthen the fiscal and economic situation of the U.S. The result will be an improvement in foreigners’ outlook on the dollar that would help preserve the dollar’s status.

Dollar-focused policies should be tied to reducing the money in circulation. This should occur as the Federal Reserve reduces its balance sheet. Doing so tames inflationary pressures and could even result in some disinflation. This would allow the hard-earned dollars of Americans to go further than they do today. 

These policy improvements should be put into law with fiscal and monetary policy rules. The rules should remove the discretion of big-government spenders and printers. This would enable people’s livelihoods to get back on track and improve for generations.    

The potential loss of the dollar’s reserve currency status could have significant economic consequences, and there are even more than highlighted here. There is, however, reason for optimism: The U.S. economy is resilient and adapts well to challenges. But will those in D.C. allow for that to happen in the dynamic marketplace? Time will tell. But let’s hope so before it’s too late for middle-class Americans and everyone else to have the opportunity to fulfill their hopes and dreams.

Originally published at The Daily Caller with Chuck Beauchamp, Ph.D.

​Key Point: The best way to let people prosper is free-market capitalism. Unfortunately, government has created a situation where inflation-adjusted average weekly earnings are down year-over-year for 25 straight months and economic growth is anemic. 

​Overview: Government failures drove the “shutdown recession” and stagflationary period over the last three years that has plagued Americans, with more banking problems to come. This is fueled by the debt ceiling fight and elevated inflation that has also rocked the U.S. dollar. The answer are pro-growth policies of less spending by Congress, less regulation by the Biden administration, and less money printing by the Fed.
 
Labor Market: The Bureau of Labor Statistic recently released its U.S. jobs report for April 2023, which was another mixed report with some strengths but many weaknesses.
 
The establishment survey is the most reported shows there were +253,000 (+2.6%) net nonfarm jobs added in April to 155.7 million employees, which has increased by +4.0 million over the last year but just +3.3 million since February 2020. However, there were cumulative revisions in the prior two months of 149,000, so on net for that reduced the net increase to just +104,000 jobs indicating a weakening labor market. Over the last month, there were +230,000 jobs (+2.7%) added in the private sector and +23,000 jobs (+2.1%) added in the government sector. Most of the private sector jobs were added in the sectors of private education and health services (+77,000), professional and business services (+43,000), and leisure and hospitality (+31,000), which these three also led over the last 12 months. But wholesale trade lost -2,200 jobs last month while no industry had job losses over the last year.
 
The household survey increased by +139,000 jobs to 161.0 million employed in April. There have been declines in net employment in four of the last 13 months for a total increase of +3 million since April 2022 and +2.3 million since February 2020, which both are 1 million below the jobs reported in the establishment survey. This could be because of reporting issues or the number of jobs each person has in the market. The official U3 unemployment rate ticked down to 3.4% and the broader U6 underutilization rate fell to 6.6%, which both are near or at historic lows. Since February 2020, the prime-age (25-54 years old) employment-population ratio is up by 0.3pp to 80.8%, prime-age labor force participation rate was 0.3-percentage point higher at 83.3%, and the total labor-force participation rate was 0.7-percentage-point lower at 62.6% with millions of people out of the labor force holding the U3 rate artificially low.
 
Given some improvements, challenges remain for Americans as inflation-adjusted average weekly earnings were down (-1.1%) over the last year for the 25th straight month.
 
Economic Growth: The U.S. Bureau of Economic Analysis’ recently released the 1st estimate for economic output for Q1:2023. Table 1 provides data over time for real total gross domestic product (GDP), measured in chained 2012 dollars, and real private GDP, which excludes government consumption expenditures and gross investment. Most of the estimates for Q4:2022 and growth in 2022 have been revised lower, providing more evidence that 2022 was a very weak economy if not a recession.

​Economic activity has had booms and busts since the government-imposed COVID-related restrictions in response to the pandemic and poor fiscal and monetary policies that severely hurt people’s ability to exchange and work. In 2022, the first two quarters had declines in real total (and private) GDP, providing a reason to date recessions every time since at least 1950. While the second half of 2022 looked better, those two quarters were influenced by net exports and inventories that would have made the economy much weaker. For 2022, real total GDP growth is reported +2.1% year-over-year but measured by Q4-over-Q4 the growth rate was only +0.9%, which was the slowest Q4-over-Q4 growth during a recover on record. Then the anemic growth of just +1.1% in Q1:2023 provides more reason that this is an extended recession or at least stagflation. The Atlanta Fed’s early GDPNow projection on May 8, 2023 for real total GDP growth in Q2:2023 was +2.7% based on the latest data available, but this rate has been lowered in recent quarters.
​
Considering the last expansion from June 2009 to February 2020, there was slower real private GDP growth in the latter part of that period due to higher deficit-spending, contributing to crowding-out of the productive private sector. Congress’ excessive spending since February 2020 led to a massive increase in the national debt by nearly +$7.6 trillion that would have led to higher market interest rates. This is yet another example of how there is always an excessive government spending problem as noted in Figure 2 with federal spending and tax receipts as a share of GDP no matter if there are higher or lower tax rates.

​But the Fed monetized much of the new debt to keep interest rates artificially lower thereby creating higher inflation as there has been too much money chasing too few goods and services as production has been overregulated and overtaxed and workers have been given too many handouts. The Fed’s balance sheet exploded from about $4 trillion, when it was already bloated after the Great Recession, to nearly $9 trillion and is down only about 5.2% to $8.5 trillion since the record high in April 2022 after rising nearly $400 billion in March 2023 then down $200 billion since then. The Fed will need to cut its balance sheet (total assets over time) more aggressively if it is to stop manipulating markets (see this for types of assets on its balance sheet) and persistently tame inflation, as we may need deflation which hasn’t happened since 2009 given the rampant inflation over the last two years.

The current annual inflation rate of the consumer price index (CPI) has been cooling since a peak of +9.1% in June 2022 but remains elevated at +4.9% in April 2023, which remains the highest since 2008 as do other key measures of inflation. After adjusting total earnings in the private sector for CPI inflation, real total earnings are up by only +2.6% since February 2020 as the shutdown recession took a huge hit on total earnings and then higher inflation hindered increased purchasing power. Just as inflation is always and everywhere a monetary phenomenon, deficits and taxes are always and everywhere a spending problem. David Boaz at Cato Institute notes how this problem is from both Republicans and Democrats.
​
In order to get control of this fiscal crisis which is contributing to a monetary crisis, the U.S. needs a fiscal rule like the Responsible American Budget (RAB) with a maximum spending limit based on the rate of population growth plus inflation. If Congress had followed this approach from 2003 to 2022, the figure below shows tax receipts, spending, and spending adjusted for only population growth plus chained-CPI inflation. Instead of an (updated) $19.0 trillion national debt increase, there could have been only a $500 billion debt increase for a $18.5 trillion swing in a positive direction that would have substantially reduced the cost of this debt to Americans. The Republican Study Committee recently noted the strength of this type of fiscal rule in its FY 2023 “Blueprint to Save America.” And to top this off, the Federal Reserve should follow a monetary rule so that the costly discretion stops creating booms and busts.

​Bottom Line: Stagflation will continue with the a deeper recession this year given the “zombie economy” and the unraveling of the banking sector which will hit main street hard. Instead of passing massive spending bills, the path forward should include pro-growth policies that shrink government rather than big-government, progressive policies. It’s time for limited government with sound fiscal and monetary policy that provides more opportunities for people to work and have more paths out of poverty. There is some optimism with the House Republicans debt ceiling bill package, but it’s got an uphill battle to become law with Democrats in the Senate and White House so more must be done.
 
Recommendations:

• Set a pro-growth policy path with less spending, regulating, and taxing at all levels of government, which include return-to-work policies.
  
• Reject new spending packages that America cannot afford nor needs; pass the RAB instead. Pass the House Republicans debt ceiling package. 
  
• Impose strict monetary rule with the Fed having a much smaller balance sheet and a much higher federal funds rate target until we End the Fed.

​David is joined by former Trump-era OMB economist, Dr. Vance Ginn, to discuss the history of economic thought; the strengths and weaknesses of the classical, Chicago, and Austrian schools of thought; whether or not we need a Fed; and what to do about excess debt and economic growth. Yes, it is a busy hour, but one you will not want to miss!

Despite the on-going, sky high, Biden-flation, American's are spending like crazy. And it's a little bit puzzling. But then again, it really isn't, because we want what we want when we want it, and we want it now!

"But that is gonna start to come to a halt very quickly, as inflation continues to take a bite out of their consumption habits" said Dr. Vance Ginn, president of Ginn economic consulting, "And part of the spending numbers that we see are really just from inflation. If you adjust a lot of these for inflation, we're actually seeing declining retail sales."

The other reality is, too many Americans are charging up their credit cards, and living beyond their means.

"A lot of people are also racking up a lot on their credit cards" Dr. Ginn told KTRH, "Credit card debt is up to a record high of over a trillion dollars across the economy, and we've seen that soar just over the last year."

And looking ahead to this year, the clock will eventually strike midnight, and the U.S. will officially be in another recession.

​Originally posted at KTRH News. 

Both Republicans and Democrats at the national level have put us down a path of slow growth, massive deficits, and high inflation. With a new Republican majority in the U.S. House and the daunting debt ceiling fight over the bloated $31.4 trillion national debt almost exclusively due to excessive spending, there’s a proven pro-growth, pro-liberty path.

In 2022, the U.S. had real GDP growth of just 0.9 percent (Q4-over-Q4), the highest inflation in 40 years, the highest mortgage rates in 20 years, and the worst stock market in 14 years. Average real weekly earnings have now declined year-over-year for 22 straight months. 

Fortunately, history is a good guide for how to overcome this mess. The two of us have served as chief economists at the Office of Management and Budget (OMB), though 50 years apart. One of us (Arthur Laffer, originator of the “Laffer Curve”) was the first chief economist of the OMB in the Nixon White House. The other (Vance Ginn) was the last associate director for economic policy at the OMB in the Trump White House.

While much has changed since the OMB was formed in 1970, the problems are basically the same today. There remains a lot of unjustifiable government spending, prosperity-killing taxes, unwarranted regulations, excessive liquidity, and harmful interference in international trade. But just because counterproductive economic policies have been around for a long time doesn’t mean we shouldn’t try for a better world. 

Each of the above areas is the subject of intense debate. In politics, these debates have their short-term winners and losers as judged by elections. But the principles of economics aren’t determined by votes. The remedy for economic malaise has been and is less government, not more. Free-market, pro-growth policies are the cure. 

The legacy of the 1970s is now called the era of stagflation, and the 2020s are shaping up to be known for the same, or worse. Even with 50 years of experience, many people still haven’t learned a lesson. 

During the Nixon and Ford administrations, the economy was stifled at every turn. The dollar was taken off gold and devalued, resulting in higher inflation. Then there was the imposition of wage and price controls, which did nothing to stop inflation but instead ravaged the economy. Government spending was out of control. Taxes were raised, and tariffs imposed, including a 10 percent import tax surcharge; such was the wisdom of the D.C. crowd. 

The consequences were rising inflation, stock market collapse, impeachment, and a weak economy. Then, President Jimmy Carter tried to do more of the same with the same consequences. 

There followed a true renaissance, led by President Ronald Reagan’s tax and regulatory cuts and Federal Reserve Chairman Paul Volcker’s sound monetary policy. Inflation crashed, the stock market soared, new jobs surged, and Reagan won re-election in a landslide, winning 49 states. 

And then there was the sad interlude of George H.W. Bush, who broke his promise by raising taxes, leading to a one-term presidency.

President Bill Clinton, partnering as he did with House Speaker Newt Gingrich, cut government spending by 3 percentage points of GDP, cut capital gains tax rates while exempting owner-occupied homes from this tax altogether, and finally, he and the Republicans pushed the North American Free Trade Agreement (NAFTA) through Congress. On the bad side, he raised the top two tax rates. But the spending restraint contributed to a budget surplus for four straight years. 

President George W. Bush, with a penchant for spending more and for temporary tax cuts, was followed by President Barack Obama, with a desire on steroids to spend even more, plus he nationalized health care. Stagnation took hold, and prosperity faded.

In his first two years, President Trump reversed some of the prior 16 years of bad policy with substantial tax cuts, historic deregulation, and other measures that helped get government out of the way, contributing to the lowest poverty rate and the highest real median household income on record. But with the onset of the pandemic, prosperity was cut short by the ill-advised massive spending increases and lockdowns.

Today, we’re once again mired in a sea of bad policies and bad consequences despite President Joe Biden’s self-serving narrative. With tax hikes, massive spending, oppressive energy regulations, soaring debt levels, trade protectionism, and a bloated Fed balance sheet, stagflation was given a brand-new lease on life.

We should follow the proven, pro-growth path (not currently taken) of sound money, minimal regulations, free trade, flat taxes, and most of all, spending restraint for the sake of the economy and human flourishing. It’s also great politics. With this elixir in hand, it would be springtime again in America. And that is something Americans can believe in.

Vance Ginn, Ph.D., is an economist and senior fellow at Young Americans for Liberty and previously served as the associate director for economic policy of the White House’s Office of Management and Budget from 2019 to 2020. Arthur Laffer, Ph.D., is an economist from Nashville, Tennessee, and was the first chief economist of the White House’s Office of Management and Budget.

Originally published at The Federalist. 

Key Point: The U.S. economy in 2022 had the slowest Q4-over-Q4 growth during a recovery since at least 2009 and average weekly earnings are now down for 22 straight months as inflation keeps roaring. But there’s hope if we just give free-market capitalism a chance to let people prosper. ​

Labor Market: The Bureau of Labor Statistic recently released its U.S. jobs report for January 2022. This report came with substantial revisions to seasonal adjustments and population estimates which could bias the data for a while given that the revised estimates include the much of the last three years of data that are highly volatile. And recall the recent report by the Philadelphia Fed finds that if you add up the jobs added in states in Q2:2022 there were just 10,500 net new jobs rather than more than 1 million reported.
 
The establishment survey shows there were +517,000 (+3.3%) net nonfarm jobs added in January to 155.1 million employees, with +443,000 (+3.6%) added in the private sector and +74,000 (+1.4%) jobs added in the government sector. Most of the private sector jobs were added in the sectors of leisure and hospitality (+128,000), private education and health services (+105,000), and professional and business services (+82,000), which these three sectors led over the last 12 months as well; information (-5,000) and utilities (-700) were the only net job declines over the last month and no sector had net job losses over the last year. Average hourly earnings for all employees was up by 10 cents last month to $33.03, or up by +4.4% over the last year. And average weekly earnings in the private sector increased by $13.35 last month to $1,146, or up by +4.7% over the 12 months.
 
The household survey had another large increase of +894,000 jobs added to 160.1 million employed There have been declines in net jobs in four of the last 10 months for a total increase of +1.8 million since March 2022, which is about half of the +3.6 million of the net jobs added per the establishment survey. The official U3 unemployment rate declined slightly to 3.4% which is the lowest since 1969.
 
But challenges remains as inflation-adjusted average weekly earnings were down -1.5% over the last year for the 22nd straight month, weighing on Americans budgets to make ends meet. And since February 2020 before the shutdown recession, the prime age (25-54 years old) employment-population ratio was 0.3-percentage point lower, prime-age labor force participation rate was 0.3-percentage point lower, and the total labor-force participation rate was 0.9-percentage-point lower with millions of people out of the labor force thereby holding the U3 unemployment rate much lower than otherwise.

​Economic Growth: The U.S. Bureau of Economic Analysis’ recently released the 2nd estimate for economic output for Q4:2022. The following table provides data over time for real total gross domestic product (GDP), measured in chained 2012 dollars, and real private GDP, which excludes government consumption expenditures and gross investment. And most of the estimates for Q4:2022 and growth in 2022 were revised lower, providing more evidence that 2022 was a very weak year if not a recession.

​The shutdown recession in 2020 had GDP contract at historic annualized rates because of individual responses and government-imposed shutdowns related to the COVID-19 pandemic. Economic activity has had booms and busts thereafter because of inappropriately imposed government COVID-related restrictions in response to the pandemic and poor fiscal policies that severely hurt people’s ability to exchange and work.

Since 2021, the growth in nominal total GDP, measured in current dollars, was dominated by inflation, which distorts economic activity. The GDP implicit price deflator was +6.1% for Q4-over-Q4 2021, representing half of the +12.2% increase in nominal total GDP. This inflation measure was +9.1% in Q2:2022—the highest since Q1:1981—for a +8.5% increase in nominal total GDP that quarter. This made two consecutive declines in real total (and private) GDP, providing a criterion to date recessions every time since at least 1950. In Q3:2022, nominal total GDP was +7.6% and GDP inflation was +4.4% for the +3.2% increase in real total GDP. But if inflation had been as high as it was in the prior two quarters or had the contribution of net exports of goods and services (driven by natural gas exports to Europe) not been 2.9%, real total GDP would have either declined or been essentially flat for a third straight quarter.

In Q4:2022, there was a similar story of weakness as nominal total GDP was +6.6% and GDP inflation was +3.9% for the +2.7% increase in real total GDP. But if you consider the +2.7% real total GDP growth was driven by contributions of volatile inventories (+1.5pp), government spending (+0.6pp), and next exports (+0.5pp) which total +2.6pp, the actual growth is quite tepid like it was in Q3:2022. For all of 2022, real total GDP growth is reported +2.1% year-over-year but measured by Q4-over-Q4 the growth rate was only +0.9%, which was the slowest Q4-over-Q4 growth for a year since 2009 (last part of Great Recession).

The Atlanta Fed’s early GDPNow projection on February 24, 2023 for real total GDP growth in Q1:2023 was +2.7% based on the latest data available.

​The table above also shows the last expansion from June 2009 to February 2020. A reason for slower real private GDP growth in the latter period is due to higher deficit-spending, contributing to crowding-out of the productive private sector. Congress’ excessive spending thereafter led to a massive increase in the national debt by more than +$7 trillion that would have led to higher market interest rates. This is yet another example of how there is always an excessive government spending problem as noted in the following figure with federal spending and tax receipts as a share of GDP no matter if there are higher or lower tax rates. 

​But the Fed monetized much of the new debt to keep rates artificially lower thereby creating higher inflation as there has been too much money chasing too few goods and services as production has been overregulated and overtaxed and workers have been given too many handouts. The Fed’s balance sheet exploded from about $4 trillion, when it was already bloated after the Great Recession, to nearly $9 trillion and is down only about 6.5% since the record high in April 2022. The Fed will need to cut its balance sheet (see first figure below with total assets over time) more aggressively if it is to stop manipulating so many markets (see second figure with types of assets on its balance sheet) and persistently tame inflation, which there’s likely a need for deflation for a while given the rampant inflation over the last two years. 

​The resulting inflation measured by the consumer price index (CPI) has cooled some from the peak of +9.1% in June 2022 but remains hot at +6.4% in January 2023 over the last year, which remains at a 40-year high (highest since July 1982) along with other key measures of inflation (see figure below). After adjusting total earnings in the private sector for CPI inflation, real total earnings are up by only +2.2% since February 2020 as the shutdown recession took a huge hit on total earnings and then higher inflation hindered increased purchasing power. 

​Just as inflation is always and everywhere a monetary phenomenon, deficits and taxes are always and everywhere a spending problem. The figure below (h/t David Boaz at Cato Institute) shows how this problem is from both Republicans and Democrats. 

​As the federal debt far exceeds U.S. GDP, and President Biden proposed an irresponsible FY23 budget and Congress never passed one until the ridiculous $1.7 trillion omnibus in December, America needs a fiscal rule like the Responsible American Budget (RAB) with a maximum spending limit based on population growth plus inflation. If Congress had followed this approach from 2003 to 2022, the figure below shows tax receipts, spending, and spending adjusted for only population growth plus chained-CPI inflation. Instead of an (updated) $19.0 trillion national debt increase, there could have been only a $500 billion debt increase for a $18.5 trillion swing in a positive direction that would have substantially reduced the cost of this debt to Americans. Of course, part of this includes the Great Recession and the Shutdown Recession, so these periods would have likely been good reason to exceed the limit, but regardless we would be in a much better fiscal and economic situation with this fiscal rule. The Republican Study Committee recently noted the strength of this type of fiscal rule in its FY 2023 “Blueprint to Save America.” And to top this off, the Federal Reserve should follow a monetary rule so that the costly discretion stops creating booms and busts.

​Bottom Line: While there appears to be a strengthening labor market in January, let’s see if this continues as my guess is that these were biased from the data adjustments, and we will see a weaker labor market in the months to come. My expectation is that stagflation will continue along with the a deeper recession this year given the “zombie economy” with “zombie labor” of many workers sitting on the sidelines and others are “quiet quitting” along with the failures of many “zombie firms” that live on debt. Ultimately, Americans are struggling from bad policies out of D.C.. Instead of passing massive spending bills, the path forward should include pro-growth policies. These policies ought to be similar to those that supported historic prosperity from 2017 to 2019 that get government out of the way rather than the progressive policies of more spending, regulating, and taxing. The time is now for limited government with sound fiscal and monetary policy that provides more opportunities for people to work and have more paths out of poverty.
 
Recommendations:

• Set a pro-growth policy path with less spending, regulating, and taxing at all levels of government.
• Reject new spending packages that America cannot afford nor needs; pass the RAB instead.
• Impose strict monetary rule with the Fed having a much smaller balance sheet and a much higher federal funds rate target until we End the Fed.
• Enact return-to-work policies.

​Vance Ginn sits down with Newsmakers to discuss the battle against inflation and the rising interest rates the Fed is imposing yet again. He touches on major economic benchmarks and explains what the numbers are really showing.

Watch here: https://www.youmaker.com/video/482a32b6-d37b-47bb-b6db-0ed3d975f04f​

T​he latest inflation report reveals that inflation is slowing, but it remains at a 40-year high. 

The stock market rose, as softer-than-expected inflation rate gave investors hope the Federal Reserve may not have to raise its target rate quite as fast. A 7.7-percent increase in prices over the last year shouldn’t make people hopeful. Many Americans can’t afford soaring living expenses, however, and the economy will worsen before there’s any relief. 

Adding to this struggle are inflation-adjusted average weekly earnings, which are down 4 percent over the last year, and have been declining for nearly two years. This deflating of the American Dream is the result of big-government policies, creating too much money chasing too few goods. 

Just the necessity of food is a struggle. Food prices at work and school are up 95 percent. Eggs are up 43 percent, and chicken, 15 percent. Gasoline to drive to the store is up nearly 18 percent and electricity, 14 percent, so even making meals at home can rock the budget.

To cope with less purchasing power, Americans are not only saving less, they’re also accruing credit card debt, to a record high of nearly $1 trillion. Even in states with comparatively low cost of living, like Texas, people with full-time jobs can’t make ends meet for their families and are showing up at food banks for help. 

Unfortunately, the worst is yet to come. 

The Fed’s meager strategy for fighting inflation hasn’t included aggressively cutting its $8.6 trillion balance sheet. The balance sheet is only about 3.8 percent less than its record high in April 2022, after more than doubling during the pandemic.

This overprinting of money affects many markets, as those dollars aren’t evenly distributed across the economy, resulting in distorted price signals. The Federal reserve adding assets to its balance sheet (by buying Treasury debt, agency debt, and mortgage-backed securities) kept interest rates artificially low. Those markets are starting to correct, as mortgage rates have risen to 20-year highs of around 7 percent. 

The Fed created the current inflationary situation (too much money), which was fueled by Congress’s deficit spending, and exacerbated by Biden’s overregulation (too few goods and services). 

Now, the false “boom” is busting. Hardworking families and entrepreneurs bear the brunt.

To combat the problem it helped create, the Fed is raising its target federal funds rate, which has grown at the fastest pace since Paul Volcker was Chairman in the early 1980s. Volcker understood that the Fed’s balance sheet mattered most, which seems to be overlooked by the Fed and many economists today. 

The Fed’s hike of 75 basis points on November 2 brought the top of the target range to 4 percent, which was the fourth consecutive 75-basis-point hike, after rates were held at essentially zero for two years. The Fed signaled that it will slow target rate hikes to likely 50 basis points in December, pushing the top rate to 4.5 percent by the end of 2022. This would be the highest rate in 15 years.

The Fed’s attempt to correct elevated inflation comes too late to avert the economic consequences of keeping the target rate too low for too long. As a result, Americans are suffering from persistent inflation, higher interest rates, and a prolonged, deeper economic recession. 

What should be done? We need pro-growth policies.

The executive branch should focus on cutting regulations. Congress should prioritize making the Trump-era tax cuts permanent, cutting the corporate tax rate, and passing spending limits to help balance the budget. The Fed, the source of so much money mischief, should adhere to a monetary rule that will cut its balance sheet as much as possible, hopefully down to nothing.

These pro-growth, liberty-oriented policies will unleash the economic potential of the productive private sector and get people back working again at well-paid jobs, while substantially reducing inflation.

Big-government policies must end before they send us further down the road to serfdom. Our newly elected officials have a responsibility to prioritize fighting inflation, and restoring the American Dream.

Originally posted at AIER. 

While a stagnating economy with high inflation is what economists usually call stagflation, the current situation is worse, as the real economy is declining. So there’s much less to go around for everyone—making us poorer in the process.

This inflation-recession could be resolved by Washington reversing course, but President Joe Biden and Democrats in Congress are doing the opposite. Their new bill, called the “Inflation Reduction Act” (IRA), will spend more, raise taxes, increase debt, and contribute to more inflation, resulting in a deeper recession.

The IRA includes estimated hikes in taxes with a new 15% corporate minimum tax rate, 87,000 new Internal Revenue Service (IRS) agents to audit more taxpayers, and new closure of “carried interest loophole.” These are each bad policies, but especially during a recession. These add up to an estimated tax hike of about $730 billion compared with current policy over the next 10 years.

The main tax hike is the new alternative minimum tax (AMT) of 15% on book income for corporations with net income exceeding $1 billion. This proposal has a rosy revenue projection of $313 billion. But businesses don’t pay taxes; they just submit them. People pay them, through higher costs, lower wages, and fewer jobs. The dynamic effects will result in less tax revenue collected from this hike.

According to a recent study by the Tax Foundation, this tax hike alone would contribute to killing 23,000 jobs, a 0.1% cut in wages, and 0.1% less in economic output. If we consider other provisions like the tax hikes on carried interest and reinstatement of the federal Superfund program, the total number of jobs killed is 30,000 with every income group having a reduction in after-tax income.

Clearly, this wouldn’t reduce inflation or help the economy recover. But there’s more.

While the IRA is aimed at taxing the rich and corporations more, the Congressional Joint Committee on Taxation finds that every income group except those with income between $10,000 to $20,000 per year would face a higher average tax rate. This would mean President Biden’s pledge to not tax anyone earning less than $400,000 per year would be broken, with about half of the burden falling on those earning less than $200,000 per year.

And the $80 billion in additional funding for 87,000 new IRS agents to increase tax enforcement and compliance is expected to bring in a phony amount of about $200 billion over a decade. But this will just increase more bureaucracy in an already overly bureaucratic federal government that will make Americans’ lives worse as they put more costs on taxpayers. Specifically, there could be 1.2 million more individual audits per year, and you can bet when the IRS doesn’t increase tax collections from legal tax returns they will come after every tax group, not just those making more than $400,000 per year.

On the spending side, the IRA provides tax incentives and subsidies for unreliable wind and solar energy, an expansion of Obamacare subsidies until 2025, and other expenditures to the tune of about $430 billion. Using these rosy assumptions, there is a projected deficit reduction of $300 billion over 10 years.

However, more conservative estimates suggest that the IRA will have less deficit reduction and will likely increase the deficit.

The Tax Foundation, Penn Wharton Budget Model (PWBM), and Congressional Budget Office (CBO) calculate a $178 billion, $247.8 billion, and $101.5 billion in deficit reduction over the next decade, respectively. But assuming the Obamacare subsidies are extended over the full 10-year period for an apples-to-apples comparison, the PWBM estimates that would bring that deficit reduction down by $158.9 billion to just $88.9 billion over the decade, which is the same amount of the deficit in just June 2022.

But recall that these estimates are compared with current policy assumptions over the next decade, which already have massive deficits because of reckless spending, so the IRA will most likely make the deficit worse.

Spending will be permanent and is on the front end of the bill, while taxes will likely be temporary and are more on the back end—so the deficit will be higher in the first few years, which will give the Federal Reserve more debt to purchase thereby creating more inflation.

And the higher taxes, more debt, and more inflation will stifle economic growth so a deeper recession will result.

The IRA does the opposite of what the name implies. This is now too common with Democrats in Congress as they like to keep redefining things that don’t match their narrative. They should instead name this bill the “Inflation Recession Act” because we will get more of both.

This far-left agenda must be rejected. Kill the bill.

Published at TPPF with Daniel Sanchez-Pinol

Americans are sacrificing their savings to keep up with soaring inflation.

This burden has contributed to consumer sentiment reaching its lowest level in June since the University of Michigan started the survey in January 1978. And the progressive policies in D.C. could soon make this bad situation worse.

The personal saving rate, which is the share of after-tax income not used for consumption, declined again to 5.1% in June. This is after it reached 33.8% in April 2020, which was a record high since January 1959, after the first round of “stimulus” checks sent by Congress during the shutdowns.

There were two more rounds of checks sent by Congress, along with enhanced unemployment payments and other handouts that weren’t connected to work, which kept the saving rate historically high as many places were shut down and people made more from handouts than they did while working.

Remember, nothing is free.

Those handouts and other government spending contributed to more than $6 trillion in additional national debt, which the Federal Reserve then mostly monetized—leading to the generational high in inflation.

The higher inflation outpaced saving and income growth since then, as the costly policies came home to roost and cut the saving rate to 5.1%—the lowest since August 2009.

What will happen when Americans run out of savings? But there’s little reprieve in sight as inflation looks to keep rising or at least not abating soon from bad policies in D.C.

Inflation, which is the loss of purchasing power of your dollar, continues upward to 6.8% in June 2022 as measured by the personal consumption expenditure (PCE) price index—the highest since January 1982. The PCE inflation measure accounts for the substitution effect from high priced goods to lower priced goods. This isn’t reflected in the often-reported measure of the consumer price index (CPI) inflation rate of 9.1%, which is the highest since November 1981.

Both measures show Americans’ money isn’t going nearly as far as it did a year ago. In fact, families’ purchasing power is set to be cut in half in just 10 years at the pace of PCE inflation and even faster for CPI inflation.

This implies that in order to maintain the same consumption levels, households have to allocate more income to consumption than to savings. And many Americans are turning to increased debt as their savings dry up.

Household debt increased to a record high of $16 trillion in the second quarter of 2022. Not surprisingly, credit card debt grew the most by 13%, which is the fastest increase in 20 years. Moreover, household debt to real economic output passed the 80% mark at the end of 2021. It’s up to 82% in the second quarter of 2022, a historically high rate, as debt increased and the real economy declined for two straight quarters.

This share will likely get worse in the following quarters as Americans go through their savings and dip further into debt. And interest rates going up means the amount to pay interest on the debt will contribute to higher balances and more pressure to meet their financial obligations.

No wonder people don’t feel secure about their economic future. Bad policies by Congress and the Federal Reserve contributed to this destruction and could even make things worse.

Congress spent too much, leading to massive deficits, which gave the Fed debt to purchase to inject money into the economy over the last two years. That inflated “boom” had to eventually “bust.” And that’s what is happening now as the redistribution by Congress has slowed some and the Fed is finally raising its target interest rate allowing markets to correct.

But Congress should be spending much less and the Fed should be more aggressive in tightening the money supply and raising its interest rate target. The famous Taylor rule suggests a rate of at least 6%, which is substantially higher than the current range between 2.5% to 2.75%.

Ultimately, what’s needed now are pro-growth policies of spending, taxing, regulating, and printing cuts instead of what’s coming out of Washington. President Biden and Democrats in Congress aren’t helping the situation with the “Inflation Reduction Act,” as it will lead to more debt and more inflation that will further deplete savings, thereby making a bad situation worse for Americans. Things must change.

Published at TPPF with Daniel Sanchez-Pinol

“We’ve had two quarters: 1.5%  decline in GDP, that’s actually done the first quarter, and this quarter now is estimated by the Atlanta Fed as being very, very close to zero,” economist Art Laffer told Fox Business. “If it comes in negative, that will be the two quarters in a row—that would be the definition of recession.”

With the economy stagnating and inflation soaring, stagflation is here for the first time since the Great Inflation of the 1970s because of bad policies out of Washington. A recession is inevitable as the government-inflated “boom” busts—and we could already be in one. But pro-growth policies would help ease the pain.

The pandemic prompted irresponsible and record-breaking deficit spending by Congress, pumping in massive “stimulus” funds that raised the national debt by $6 trillion to $30 trillion, or about $90,000 owed by every American.

And President Biden has also been on a regulatory spree. His administration has finalized 360 rules through June 17 with a cost of about $215 billion, according to the American Action Forum. Compared to the same time since its inauguration, the Trump administration completed 367 rules at an economic cost of $1.2 billion.

Those bad policies by Congress and the Biden administration have been a major reason why the economy is stagnating, with negative growth in the first quarter of 2022 and likely little to no growth in the second quarter. And the Fed purchasing that debt and printing too much money to chase too few goods resulted in a 40-year high in inflation.

This stagflation affects employers and workers.

Firms now can hold less inventory for the same amount they paid previously, which reduces their profitability and causes them to increase prices, cut costs, or reduce output to keep up with inflation. And consumers have less purchasing power.

Workers and employers must then reduce their spending and investment, respectively. With workers producing less, productivity declined by at the fastest rate since 1947, contributing to why inflation-adjusted average hourly earnings are down substantially over the last year.

Another issue is that safety-net programs were increased without work requirements during and since the pandemic. Those programs included expanding Medicaid, increasing child tax credits, and enhancing unemployment insurance payments. This has created even more dependency on government.

And these expansions of government contributed to soaring deficit-spending with a 25% increase in the national debt in just the last two years. These handouts also encouraged people not to work because they would lose more in payments than they would receive from working. There are now 5.5 million more unfilled jobs than unemployed workers.

In order to reduce the pain of the inevitable recession, Congress ought to adopt pro-growth policies, similar to those between 2017-2019. These policies included a concerted effort to reduce onerous regulations and to pass the Tax Cuts and Jobs Act. They contributed to the U.S. records of the lowest poverty rate (across most demographics) and the highest inflation-adjusted median household income.

But excessive spending was an important factor that was missed then because Congress spent too much. If Congress just reined in spending to no more than population growth plus inflation, as outlined in the Foundation’s Responsible American Budget (RAB), the $20 trillion increase in the national debt over the last 20 years would instead have been a nearly $3 trillion surplus.

This would have meant more money in Americans’ pocket and more economic growth from lower interest rates and less debt for the Fed to purchase to create inflation. Which is why the Fed also needs a monetary rule, which would call for it to have a much smaller balance sheet to reduce the quantity of money and a much higher federal funds rate target.

Historically, the federal funds rate target must be as high or higher than the rate of inflation. With the latest inflation rate being 8.6% and the federal funds rate target being in a range of only 1.5%-1.75%, the rate target should be much higher. While this would likely result in a quick and deep recession, this is necessary given the government-inflated boom that must now bust.

Bad policies have driven this government failure that’s making the situation worse before it gets better. For the sake of Americans, let’s end them now, because more government isn’t the solution.

https://www.texaspolicy.com/economic-stagflation-is-here-is-a-recession-next/

Americans have less money than they had last year—though taxes haven’t been raised. So what’s the problem? Inflation, which has increased at a 40-year high annual pace of 7.9%. It acts as a hidden tax because we don’t see it listed on our tax bills, but we sure see less money on our bank accounts.

In fact, inflation-adjusted average hourly earnings for private employees are down 2.8% over the last year. This means a person with $31.58 in earnings per hour is buying 2.8% less of a grocery basket purchased just last February. “For a typical family, the inflation tax means a loss in real income of more than $1,900 per year,” stated Joel Griffin, a research fellow at The Heritage Foundation.

The hidden tax of rapid inflation has been avoided for four decades. But that’s understandable because we haven’t seen these sorts of reckless policies out of Washington since the Carter administration.

The policies from the Biden administration’s excessive government spending and the Federal Reserve’s money printing must correct course now before things get worse.

What’s causing inflation is being debated.

One claim is “Putin’s price hikes” stem from the Russian president’s invasion of Ukraine.

While this has contributed to oil and gasoline prices spiking recently, these prices—and general inflation—were already rising rapidly. This was because of the Biden administration’s disastrous war on fossil fuels through increased financial and drilling regulations, cancelation of the Keystone XL pipeline, and more.

Specifically, the price of West Texas Intermediate crude oil is up about 110% since Biden took office, yet only up 21% since Russia invaded Ukraine. And to think, the U.S. was energy independent in the sense that it was a net exporter of petroleum products in 2019.

Another claim is the supply-chain crisis.

For example, the global chip shortage has contributed to a large shortage and subsequent increase in the average price of new vehicles—to a record high of $47,000, up 12% over the last year. This contributed to buyers switching to used cars, which has pushed the average price up to nearly $28,000, about 40% higher.

These two claims will likely be transitory price increases, though not sufficient to drive down overall inflation to what we’ve experienced for the last year-plus.

Inflation is persistent because of rampant government spending and money printing.

Larry Kudlow, who served as the director of the National Economic Council for President Trump, stated that inflation “is destroying working folks’ pocketbooks and devaluing the wages they earn, and the root cause of the inflation is way too much government spending, too many social programs without workfare, and vastly too much money creation by the Federal Reserve.”

Both political parties share the blame for too much government spending, which has caused the national debt to balloon to $30 trillion. Just over the last two years, the debt has increased by 25% or $6 trillion.

While some of that may have been necessary during the (inappropriate) shutdowns in response to the COVID-19 pandemic, much of the nearly $7 trillion passed in spending bills was not, especially the trillions by the Biden administration far after the pandemic had slowed and people were returning to work.

Laughably, Speaker of the House Nancy Pelosi recently argued that government spending is helping inflation and President Biden argued that he’s cutting the deficit. Both are false.

Government spending doesn’t change inflation because it just redistributes money around in the economy. And the deficit would only be rising from Biden’s big-government policies but he’s taking advantage of an optical illusion: one-time COVID-19 relief funding drying up and tax revenues rising partially from the effects of inflation.

Ultimately, the driver of inflation is from discretionary monetary policy by the Federal Reserve as it monetizes much of the $6 trillion in added national debt since early 2020.

The Fed did this to keep its federal funds rate target from rising above the range of zero to 0.25% by more than doubling its balance sheet to $9 trillion. More money is fueling the ugly government spending and bubbly asset markets that’s resulting in dire economic consequences.

Instead, we need to learn what Presidents Harding and Coolidge realized a century ago. This would mean a return to sound fiscal policy, monetary policy, and the dollar that built on the principles of America’s founding.

We need binding fiscal and monetary rules to hold politicians and government officials in check of we hope to tame inflation and return to prosperity.

https://www.texaspolicy.com/the-tax-increase-thats-hidden-in-plain-sight/

​Overview: The COVID-19 pandemic and forced business closures by state and local governments over the last year left much economic destruction. Many Americans have been recovering as we near herd immunity and states reopen, but fiscal and monetary policies out of D.C. are distorting economic activity and the labor market. For example, the labor market has been improving at a slower pace in recent months, even as there has been at least $6 trillion in passed or proposed bills during the first 100 days of the Biden administration. The federal unemployment “bonuses” and even more in handouts have reduced incentives to work, resulting in a similar number of unemployed as the record high of 9.2 million job openings. Although the economy has withstood these headwinds for now, a pro-growth approach is necessary.