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Inflation? What's Inflation?

Jeff Hall

Posted on November 21, 2021 21:11

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Deficit hawks have been warning against inflation for years, but it never came as predicted. Now it's finally here. What can we do?

Prices are rising worldwide, so it's not just a U.S. phenomenon. For this reason, let's avoid the blame game as to which political party might be at fault.

The 2017, Trump tax cuts blew a $2 trillion hole in the deficit; the Biden infrastructure bills, while covered by increased taxes, will still pump a lot of cash into the economy.  Inflation is often described as "too much money chasing too few goods."

I had to reach into my memory banks to recall that definition of inflation, since I haven't experienced inflation since the late sixties through early eighties. Interest rates in those days got up into the 20% range. People were actually taking out mortgages at rates this high.

Inflation isn't pretty; I recall actual fear in the air, like our economy was spinning out of control, everything was become less affordable and nobody seemed to know what to do.  There is no doubt in my mind inflation was a huge contributor to Ronald Reagan's landslide victory over one-term President Jimmy Carter.

President Reagan and his team prescribed a mix of economic policies that remain controversial to this day. There were tax cuts and a reduction in the capital gains tax that overwhelmed cuts in federal spending. Some think these tax cuts led to the rich getting richer. Others think this touched off an entrepreneurial wave that helped grow the economy and create jobs.

Oil and gas prices were a big contributor to inflation back then, as well. The oil reserves were increased, as was production, reducing energy costs.  While this helped reduce inflation, it slowed progress in the shift to renewable energy. One of Reagan's first acts was to remove solar panels from the top of the White House, installed during Jimmy Carter's administration.

The economy in the early eighties went into a downturn. Reagan's policymakers felt an engineered-recession was the tough medicine America needed to cure inflation. Unemployment climbed in the early years of Reagan's first term, but interest rates started coming down.

By 1984, unemployment and inflation returned to historically more normal levels, and once again, Reagan won in a landslide over Democratic candidate Walter Mondale. Many Democrats -- called "Reagan Democrats" -- voted for Reagan. People obviously pay attention to pocketbook issues; Biden would be smart to pay heed (and he knows this).

Today's situation might not be entirely dire.  Maybe the COVID-induced supply chain disruptions are a temporary thing. Jobs are going begging and wages at the lower rungs are climbing rapidly. The stock market and housing markets are hotter than hot (helping some, hurting others). It feels like we are going through a transition.

Must we experience a crash first? Or are we getting smarter about managing these things? Will calls for deficit reduction be heard this time? Time will tell. But in the near-term, Democrats would be wise to not simply dismiss fears about inflation. If persistent inflation grips the economy, the party in power will be blamed. 

 

Jeff Hall

Posted on November 21, 2021 21:11

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Source: CNN

CNN's Christine Romans breaks down the ways in which the US economy is roaring back after the Covid-19 pandemic slump....

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