American Economy

FISCAL POLICIES

A SPUTTERING ECONOMY

Excessive government spending is dragging down the US economy, analysts say

By John Ransom

President Joe Biden announces the Paycheck Protection Program at the South Court Auditorium of the Eisenhower Executive Office Building in Washington on Feb. 22, 2021.

year ago, president

Joe Biden was riding a 59 percent approval rating in the polls, having just signed what he called the “American Rescue Plan” (ARP), a stimulus package that the administration promised would “provide direct relief to Americans, contain COVID-19, and rescue the economy.”

A year later, having approved the $1.9 trillion ARP spending plan and another $1 trillion of spending on infrastructure, the U.S. economy has contracted, raising the specter of high inflation and low growth known as “stagflation,” as Biden struggles with his popularity.

In the first quarter, the economy shrank 1.4 percent, the Commerce Department said on April 28. Previously, economists expected growth of 1.8 percent for the quarter, according to figures at the Philadelphia Federal Reserve.

It may leave many people wondering how, after approving nearly $3 trillion in spending measures in 2021, the economy could be in retreat.

A man who was appointed by President Bill Clinton and served under President George W. Bush as head of the Government Accountability Office (GAO) thinks he knows how.

“The dramatic increase in alleged COVID-related spending was a primary contributor to stimulating the economy in 2021, but it also stoked excess inflation,” David Walker, who was appointed comptroller general in 1998, told Insight.

“Excess inflation, high energy costs, increased mortgage rates, and supply chain challenges served to reduce consumer spending in the first quarter of 2021.”

Inflation Followed the ARP

Indeed, inflation began to spike just months after Biden signed the ARP.

And while energy prices were trending higher under Biden, the first-quarter increase in 2022 represented the type of fuel price spike the country hasn’t seen since just prior to the 2008 market crash.

Depending on whom one believes, Biden either will or won’t allow oil and gas drilling on federal lands to help alleviate price pressures on consumers, which doesn’t exactly make drillers feel

$4.6

TRILLION

HAS BEEN COMMITTED TO

COVID-19 relief measures in the United States, with $3.6 trillion paid out already.

CONSUMER CONFIDENCE IN THE US ECONOMY

76%

20%

say it’s getting worse say it’s improving

3%

say it’s staying the same

Source: Gallup

The dramatic increase in alleged COVIDrelated spending in 2021 stoked excess inflation, an expert says.

“Democrats’ reckless spending is bringing us back to the Carter years of a shrinking economy and soaring inflation.”

Mike Berg, deputy communications director, National Republican Congressional Committee confident that the long-term expense of drilling new wells is justified.

“We’ve had enough head fakes that we’re going to be very thoughtful in ramping activity up,” Rick Muncrief, CEO of Devon Energy Corp., told the trade publication World Oil in February.

COVID-19, Inflation Add to Concerns

Americans may also be growing weary of “head fakes” as the country recovers from COVID-19.

Consumer confidence, which is the key to consumer spending, has taken a steep nose dive recently, dropping below the lowest number it posted during the worst of the COVID-19 crisis, according to figures by the polling organization Gallup.

“Seventy-six percent of Americans say the economy is getting worse, 20 percent say it is improving, and 3 percent think it is staying the same,” Gallup said.

The high cost of living, the economy in general, and fuel prices lead consumer concerns, as inflation rises to its highest level since 1981, the survey said. Overall, the country committed about $4.6 trillion to COVID-19 relief measures, with $3.6 trillion paid out already, according to data by the Treasury Department. That’s a lot of spending in just two years, especially when compared to the Obama stimulus plan, which spent $787 billion over a fouryear period. Approving more money to spend to create more economic activity risks making inflation worse, but analysts note that politicians have a hard time doing nothing amid a crisis in an election year, even if the things they do create even more damage.

“Biden certainly isn’t helping things,” Walker said, adding that the administration’s measures have hurt the economy, such as bans on domestic oil exploration and federal mandates that have led to job losses and economic disruption.

The White House didn’t respond to a request for comment by press time.

No Good Policy Choices Left

Policymakers at this point have few good choices, some say, which tends to be the case when inflation spikes in an uncontrolled frenzy.

“There is a serious conundrum as prudent measures to quell inflation might push the world into a recessionary situation while measures to stimulate growth and fight contraction might cause infla-

The first-quarter

energy prices increase in 2022 represented the type of fuel price spike the country hadn’t seen since just prior to the 2008 market crash.

Source: YCharts

US Retail Gas Price 4.211

4.00

3.20

2.40

1.60

2008 2010 2012 2014 2016 2018 2020 2022

tion to spiral recklessly out of control,” Bryan Slusarchuk, a precious metals mining operator, told Insight.

Already, Republican election campaigns are sharpening daggers, using the combination of slow economic growth and high prices as the tip of what could be a dangerous weapon against Democrats in the midterms.

“Democrats’ reckless spending is bringing us back to the Carter years of a shrinking economy and soaring inflation,” Mike Berg, a spokesman for the National Republican Congressional Committee, said on April 28, warning about “stagflation.”

Other experts, including Biden critics, are taking a more wait-and-see approach, saying that the first-quarter contraction could be just a temporary downturn. First-quarter gross domestic product (GDP) performances are notoriously difficult to gauge because of weather and other factors.

“I try not to read too much into one month or one quarter of data. Maybe it’s a blip. Maybe it’s the effect of various bad policies. Maybe it’s a pandemic hangover,” Dan Mitchell, a free-market economist and co-founder of the Center for Freedom and Prosperity, told Insight.

Mitchell said Americans should be thankful that Biden’s social spending package, known as “Build Back Better,” wasn’t approved in the fall, or things could be worse.

“The threat of Biden’s so-called Build Back Better has probably had a negative effect since businesses, investors and entrepreneurs don’t know whether it will still be profitable to create new jobs,” he said.

Student Loan Action Could Add to Inflation

Things could grow much worse if Biden takes action toward reducing the $1.6 trillion in outstanding student loans, which in effect would be no different than if Biden approved any other spending bill for $1.6 trillion, conservatives warn.

“Even a modest increase in inflationary pressures [caused by student debt cancellation] could feed into current inflation dynamics, increasing the risk of a wage-price spiral and making it harder for the Federal Reserve to re-anchor inflation expectations around its current target,” the Washington-based nonprofit Committee for a Responsible Federal Budget said.

The contraction in GDP may signal the end of the inflationary spiral, but with a trillion dollars in unspent COVID-19 relief and a range of options for Biden to cancel student debt, there still may be enough fuel to keep inflation raging even as the economy slows, a textbook case of stagflation.

Still, some say that the track record of economists and politicians who are now reassuring people there’s nothing to worry about is anything but reassuring.

“First we were told inflation was imaginary. Then we were told it was ‘transitory,’ the result of COVID-inflicted supply-chain problems. Then we were told it was Russian President Vladimir Putin’s fault,” law professor Glenn H. Reynolds wrote in an op-ed in the New York Post.

“If the Biden administration wanted to fight stagflation, it would be cutting red tape, encouraging business activity and investment, and slashing federal spending. But it’s not doing that.”

Instead, Biden is saying that “technical factors” led to a one-time drop in GDP, and he is hoping the economy and his poll numbers will rebound. 

SPOTLIGHT

Sailing for Speed

COMPETITORS TAKE PART IN ONE OF

the events of the French stage of the GWA Wingfoil World Cup, during the 25th edition of the Mondial du Vent event, in Leucate, France, on April 29. The event runs from April 26 to May 1.