Editor’s Note: This new column by the Journal’s business editor will examine economic and financial issues — locally, regionally and beyond.
May 1 is here already. There are reasons 2023 would seem like a swift-moving year, but it’s been painfully slow for those watching the economy with concern. After all, we’re witnessing a historic slow-motion battle between the Fed and inflation, before it metastasizes into a monster.
The thing with inflation — the idea behind it — is that if the broad marketplace is flooded with more and more money, more and more cash, and there’s an accompanying downturn in supplying goods and services, then prices will go up and up in a scenario economists call demand-pull inflation, or more simply, “too much money chasing too few goods.”
We’re seeing the high prices inflation produces at the consumer level: steep costs for milk, eggs, or cars and computers. It also spills over into rents and other bills. Inflation itself, as menacing as it is, could become even more ruinous, because it can destabilize a country’s economy, indeed the world’s.
Economic forces that play out in a nation can become wildly complex and history has seen examples of inflation becoming monstrous.
The most widely referenced inflation crisis was the stagflation era of the 1970s. Stagflation is basically high inflation with high unemployment and poor production — or stagnation. What happens to cause stagflation has generated many theories, but it’s not just an academic exercise. Some economists today caution we ought to keep on the lookout for its resurgence. Others believe we’re not there yet. But with the Fed today facing complex factors with uncertain outcomes, we can’t be certain how things will turn out exactly but we can look back at the 1970s stagflation era, which had the biggest Fed hike in history to see if there are any lessons we may glean from it.
First the numbers: Last week, Journal reporter Matthew Narvaiz reported that New Mexico’s string of low unemployment rates over the last few months continued in March, with unemployment at 3.5%, down from 3.6% in February. Labor participation had improved also. The jobless rate for the U.S. was also low at 3.5%. Normally, that would be a source of comfort. Such a low unemployment rate has eluded many political leaders. So why the long faces, economists?
Let’s get back to stagflation for some insight.
What we first notice about the period in the 1970s in the U.S. is that social and economic conditions were different then, but there were some similarities to our time. (By way of comparison, inflation was 12.3% in 1974 and 13.3% and 12.5% in 1979 and 1980 respectively. It was 1.4% in 2020, 7.0% in 2021 and 6.5% in 2022, the post pandemic years.) Back then, there was massive spending on war, the Vietnam War, and that’s been blamed by some theorists as triggering money supply imbalances. There were bank failures, there were political decisions about the national economy — Nixonian policies were also blamed for stagflation. There were rising interest rates, there was high demand and high prices for goods and services. One notable difference was the oil and gas crunch of the mid-70s when the price of oil rose 300% because of the Arab Oil Embargo over Israeli policies. That’s what economists called a supply shock. The nation likely felt itself to be in survival mode back then.
Enter Paul Volckler, new Fed chairman in 1979. By today’s and 1980s standards his actions were radical. Volckler broke stagflation by allowing rates to rise to record levels, to show the markets just how serious the Fed was about taming inflation, plunging the economy into a recession. In 1980, with inflation at 12.5%, the Fed pushed the federal funds rate to 18%, then later that year to 20%. The bold move did indeed stop inflation and sent it scurrying away to never return with such force — that is until 2022.
In 1982, the “Volckler pivot” took place, in which the Fed put the kibosh on high rates. Unemployment and production stabilized soon after. In a September New York Times column, finance writer Jeff Sommer says Volckler’s skill was in switching the focus from interest rates to money supply, another tool at the Fed’s disposal but one, Sommer says, that takes a back seat in today’s economic policy priorities. A focus on the money supply involves making policy by buying or selling bonds on the open market.
No one’s considering interest rates rising to such levels as they did in 1980. Or, more accurately, Fed Chairman Jerome Powell hasn’t discussed that publicly. Some experts are already predicting a recession could be triggered at much lower rates. Powell has indicated that the idea is not to drive the economy into recession in order to save us all from inflation, but to go as far as it takes with smaller rate hikes to cool down the economy. But despite incremental rate hikes, the economy hasn’t cooled much. Numbers on US gross domestic product released last week show that the economy may be beginning to get the message, as growth slowed in the first quarter. GDP rose 1.1%, the government reported, but consumer spending rose and unemployment remained low.
Economist Bill Conerly, in a June 22 Forbes magazine article, says the root cause of stagflation is the timing effects of monetary policy. In a nutshell, Conerly explains that Federal Reserve policy can affect employment before it affects inflation. Employment can slow down while inflation doesn’t budge. Inflation will come down eventually if unemployment rises, the story goes, but it takes time — months — for Fed policies to reach that point. That in-between period, Conerly says, is stagflation time.
But Sommer offers up an optimistic note for our time: “Note this: In Mr. Volcker’s time, when it seemed that the pain would go on forever, there was a quick and remarkable improvement.”
So then, we ought to keep our eyes on those nice employment numbers. Given the economic analysis out there, it seems a glittery dream that inflation would come down without a rise in unemployment. I know the Fed would love it if that happens. What’s the song? “Fairy tales can come true, It could happen to you.”
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In today’s Outlook, Matthew Narvaiz writes about developments in the nascent cannabis industry, Alaina Mencinger has stories on American Home Furniture & Mattress and its move from its longtime Carlise address, Donna Cygan returns with good home finance advice in “Invest” in Joy and contributor Brian Adams takes us inside the world of angel investors. There’s more inside.