It’s official—we’re in a recession. And have been all year.
The government reported today that there were two consecutive quarters of declining inflation-adjusted economic output to start 2022, a condition that has been called a recession every time since 1950. And inflation is running at a 40-year high.
Americans are struggling in the Biden economy. Consumer expectations about the economy have dropped to the lowest in nearly a decade. Small business sentiment is at a 48-year low. Even as the Biden administration is stuck on how to define a “recession,” Americans feel this depressed economy.
This stagflation on steroids hasn’t been seen in a generation and it is the direct result of the economic policy disaster coming out of D.C.
Forty years ago, the economy dealt with a similar situation after bad policies from the Carter administration and the Federal Reserve. It took severe monetary tightening by Fed Chair Paul Volcker and a double-dip recession to correct the prior government failures.
Fortunately, the Reagan administration balanced some of Volcker’s (correct) quantitative tightening with a pro-growth policy approach of some spending restraint, large tax cuts, sensible deregulation, and more free trade agreements. These policies removed barriers imposed by government and supported incentives to work and invest so that the economy expanded, such that the next 20 years are called the Great Moderation.
Fast-forward to today and we’re in a similar economic situation with a recession and high inflation but without the same bravado of sound policy at the Fed or in the White House.
Instead, Federal Reserve Chair Jerome Powell has been tightening monetary policy at a faster rate than in recent years—but at a much slower rate than Volcker did then, meaning high inflation will likely persist.
And President Joe Biden is clearly no President Reagan.
In fact, just this week President Biden has been pushing a $280 billion spending bill known as the “CHIPS Act,” which is essentially taxpayer handouts to semiconductor businesses and the tech industry that may help China in the process at the expense of all other businesses and Americans. The Senate passed the CHIPS Act and the House likely will, too, as some see it as “free” money to win votes.
Instead of increasing corporate welfare, raising the national debt, and likely driving inflation higher, the answer should be to reduce the cost of doing business by cutting taxes, spending, and regulation, which is a proven recipe for prosperity.
We’ve seen the opposite. When you overinflate an economy through overspending by Congress, overprinting by Fed, and overregulating by Biden, these are the depressed and depressing results.
And Biden and Congress are doubling down on bad policy.
There may be an agreement in the Senate on a scaled-down version of “Build Back Better” in a reconciliation bill, which is being scored over a decade at $430 billion in new spending but potentially a reduction in the debt by $300 billion from an estimated $730 billion tax hike. But the devil will likely be in the details of how much more permanent spending is hidden, as in previous versions, and how much of this temporary tax hike won’t materialize in more revenues as it makes the recession more severe.
Tax hikes don’t work to reduce the deficit because they slow economic growth, which reduces tax revenues. And this is the worst time to be raising taxes, much less paying for $370 billion more for the Green New Deal, forcing us toward unreliable energy sources at a very high cost.
So this will likely raise the deficit, give the Fed more ammunition, and raise inflation further at the expense of growth. We can’t afford these progressive policies.
But we can correct past government failures faster and have another long period of economic prosperity like after Volker and Reagan.
The Fed should move back to a rules-based monetary policy and tighten more quickly now. Congress should pass a fiscal rule that restrains or cuts spending and make the Trump tax cuts permanent while finding more tax relief. And Biden should roll back his onerous regulation and sign free trade agreements.