Dec. 16, 2021

Reagan's Answer To Stagflation.

A dilemma is a situation you find yourself caught between two equally undesirable alternatives. And that's Stagflation. On the one hand, the economy is caught with high inflation. But on the other hand, low growth.

For a very long time, economists believed that Stagflation could not exist. Either it was one: say high inflation. Or it was the other, low growth. But never, they thought both together.

However, that debate came to a screeching halt in the 1970s. When the American economy suffered from both barrels of the most virulent high inflation, low economic growth that the country had ever seen.

I think that this bout of Stagflation in the 70s can be very illustrative of what we face today. So, buckle up, we're going to take a quick overview, the 30,000-foot overview, of just what were the forces in play, back then.

The reason, I think, that traditional economists had such difficulty in understanding Stagflation back then, is that they underestimated the dominant role the government can play in the economy.

With the possible exception of Franklin Roosevelt back during the Great Depression and World War II, we hadn't really seen the tremendous Government spending as we did beginning in the late 1960s.

Under President Lyndon Johnson, the nation both fought a war, View Nam, and began tremendous social spending, the Great Society. This was the so-called guns and butter program.

This all continued under Johnson's successor, Richard Nixon. As both the war in Viet Nam and essentially all of the social spending carried on.

It fell to the third president, Jimmy Carter, to be in the White House when the bills came due. At last, the war was over, and there was an opportunity to reduce social spending, but that opportunity was not taken.

Certainly, the Economic Fates were not kind to Carter. He was, after all the one who all the bills, from war, from social spending came due. But he also had to meet the OPEC Oil Embargo, when the middle eastern countries which supplied much of our oil, first limited our shipments, and dramatically raised the price. A double whammy if you will.

But it was Carter's approach which I believe was flawed, that got him in real trouble. And in the end, is his legacy.

Carter saw inflation, and choose that side of the Stagflation to attack. And he attacked it with a vengeance. Doing everything he could to lower the demand side.

He encouraged Americans to wear sweaters and lower the heat in their house. He lowered the national speed limit to a maximum of 55 miles per hour. He rationed gasoline. Then there were the odd and even days. You could only fill up your car, on the day your car license ended. Odd or even.

Obviously, these were all designed to counter OPEC's embargo and to lower the impact of one of the chief contributors to inflation, the price of gas.

And this all exemplifies how Washington looks at the economy. Especially for those big-government types, who like to be in control.

They only see two dimensions to the economy direct government stimulus, like what we've seen this year. Or control. Especially wage and price. And here it's a tradition that goes back generations. Nixon had his wage controls, Carter his rationing.

And I sense that we're in for a repeat of this all.

Notice that Jerome Powell and the Federal Reserve decided to fight this battle on the inflation side of the equation. Reducing QE and raising rates. Both are designed to lower the rate of increasing prices. In other words, reduce inflation.

And of course, the other side of the battle inflation coin will be to slow the economy. Just like Nixon did with wage and price controls, and Carter did with rationing.

Well, I can hear you thinking: we already did stimulus and that didn't work. We sent out trillions of dollars, and the economy is no better off than it was before.

Yes, that is true. But that wasn't the right kind of stimulus.

It turns out that there's a third alternative.

It's an alternative that's only been tried twice. The first time it lasted for decades, The second time it was cut short by circumstance.

That third alternative includes a jigger of direct government incentives and a jigger of freedom.

Principally it requires of government that it get out of the way.

As you no doubt have already guessed, this was the Program of Ronald Reagan. This new program, lowered regulation, reduced taxes, and stood back, while American entrepreneurs grew the economy.

It took the ball out of Washington's hand and put it squarely in the hands of small and large businesses across the country.

And once the economy built up a head of steam it lasted throughout the rest of the 20th century and even into the 21st.

Now many of you may think that I'm giving credit for all this to President Reagan. I'm not. And neither would he take the credit if he were here.

Because he recognized more than anyone else of his time. That the hard work and innovation of the American People would grow us out of Stagflation.

Now you may be wondering what the second time that this approach was used in Washington. The answer was the Tax Cuts and Jobs Act enacted in 2017 under President Trump.

But the two approaches were the same.

Get government out of the way, and the American People will take us out of Stagflation.