Fixing our current economic problems is as easy as looking at the past

Rising inflation, historical Fed raising interest rates, unemployment at the highest level, employers begging for workers – and almost everyone else is afraid to see what the stock market has to offer tomorrow. It is not clear whether the economy is simply suffering from poor digestion of monetary and fiscal policy or whether something deeper is happening.

Can the Fed stick the needle and shrink the economy to cool inflation while avoiding a catastrophic recession? Will an increase in the interest rate by 75 basis points provide any relief? Or has America’s free market economy been so overwhelmed by constant political turmoil that it cannot respond predictably to another change in monetary policy?

When looking for viable answers to these questions, our political leaders throw the blame elsewhere and point out things beyond their immediate control. These excuses include an uncertain recovery from past recessions, shutdowns of COVID-19, supply chain disruptions that require time to heal, and the invasion of the Russian war-loving president, which destroyed one of the world’s largest energy gas stations.

While each of these scenarios contributes to economic chaos, the decisions of past and present administrations – including those of Barack Obama, Donald Trump and Joe Biden – to subsidize economic sectors and deposit freshly printed money in taxpayers’ bank accounts may be most responsible.

After releasing trillions of dollars in incentives that pursue limited supply of goods, services and travel opportunities and raise prices, our political leaders have doubled. They created, defended and left intact regulations, tariffsand subsidies that build firewalls around America and offer special benefits to important interest groups.

Let’s look at the Federal Reserve’s data comparing the annual growth of the S&P 500 stock market index and the consumer price index (CPI), compiled monthly by the Bureau of Labor Statistics to track inflation. From the beginning of 2020, data show that the stock market is recovering from the recession caused by COVID, along with very low inflation rates.

But around February 2021, S&P exploded as incentives and other money hit the market. The CPI has started to show higher inflation as consumers spend more.

Recently, S&P’s growth stumbled as stimulus activity slowed and the Fed began talking about raising interest rates. Inflation, which lags behind stimulus money, continued to rise, even as S&P – burdened by higher interest rates and since then justified fears of even higher ones – turned negative territory.

The economy is too hot, but there are still viable ways to cool it. A situation like this is not new. As unlikely as it may seem at the moment, overcoming the fever of the economy will require national leadership with a clear, principle-based vision. Those who think less in terms of politics and more in terms of real results know what can happen when restrictions on trade and economic activity are reduced or made more flexible, when property rights are protected, when the tax mismatch between what one produces and what one can keep is reduced, and when the actions of the monetary authorities clearly and closely reflect the relationship between money and the economy.

Not so long ago, both former presidents Ronald Reagan and Bill Clinton chose to reduce the size, scope and temperature of the economy to more bearable levels. The record set by their inspired changes speaks for itself: low inflation, stable GDP and employment growth. Yes, between inflation, the stock market crash, wondering what the Fed will do next, and the fear that comes with filling your gas tank – there’s a lot to worry about. But if we focus only on these financially measurable indicators, we lose sight of the still productive economy, in which people go to work every day and produce real goods and services that we all welcome and enjoy. Until recently, we enjoyed strong GDP growth and a recovery in the labor market, which left us with unusually low unemployment rates.

Our economic engine is strong enough to withstand difficult policy changes, as long as they are wise. Past policy actions have flooded this stable engine with too much money. The Fed will try to bring the growth of money supply in line with the growth of the real economy, because maintaining this balance is important. For now, let us alleviate our anxiety by remembering that we will once again enjoy prosperous times. And by looking at our current economic problems as a lesson, we can avoid a new battle with inflation in the future.

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