December 16, 2022

It’s the Economy, Stupid! — But Whose Economy?

by Hal Gershowitz

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Now, on to today’s column.

Nothing hurts a President more than a troubled economy. Likewise, nothing helps a President more than a strong economy. The problem is that all Presidents inherit conditions that will influence the economies with which they will contend, and from which they will benefit or, conversely, suffer. Inherited economic conditions are equal opportunity influencers.

Is that to say Presidents do not influence the economies associated with their respective administrations? Certainly not. But every Administration will contend with economic realities over which they have no control upon entering office. Some may have long-lasting implications and take time to turn around.

For example, the recession Franklin Delano Roosevelt inherited prevailed, notwithstanding the massive measures he presided over to turn the nation’s economy around. However, the lead-up to World War Two, when America became the Arsenal for Democracy, is what returned vigor to the American economy. Roosevelt’s Lend-Lease Act of 1941 turned out to be a far more potent stimulus to the economy than his National Industrial Recovery Act of 1933.

President Trump was correct when he announced in June 2020 that 2021 would see a “rocketship” recovery from the pandemic, predicting, “next year is going to be one of the best years we’ve ever had economically.” Well, rocketship economic recoveries aren’t something inflation scolds embrace. President Trump correctly rushed financial assistance out to American households, as did President Biden. Erring on the side of more rather than less was the right call, and given the near-total shutdown of the economy during the height of the pandemic, the nation came through it remarkably well. And both the Trump and the Biden administrations will be treated well by history for the steps they took to finesse the economy through a near cessation of economic activity. Armchair second-guessers deserve a giant raspberry.

Indeed, economists also knew that immense inflationary pressures would be almost simultaneously unleashed as the nation began venturing out and returning to normal. It was pretty much unavoidable. Few economists, with the exception of a handful from the academy, such as Larry Summers, expressed strong concern when President Biden kept the printing presses going to the tune of another $1.9 trillion to speed along the country’s economic recovery after two years of COVID lockdowns.

We were flying by the seat of our pants, but, by and large, actions taken during both the Trump years and, so far, during the Biden years have been far more right than wrong. About $5 trillion quickly began flowing into every corner of the economy during the Trump Administration and continued and accelerated aggressively into the Biden Administration. $1.9 trillion went directly to individuals and families, $1.7 trillion to businesses, $745 billion to state and local government, $482 billion to health care, and another $288 billion was spread through the economy for various miscellaneous services. There had been nothing like it in history. We had a remarkably brief recession, lasting only weeks, in the face of one of the most significant economic jolts in our history.

Individual and family credit ratings held up remarkably well throughout the emergency. As Louise Sheiner of the Brookings Institution observed, “It is a lesson that if you don’t want a recession to have really long-lasting bad effects, you spend a bunch of money, and you prevent it.” While it sounds pretty reckless, it worked.

Soon, the nation’s household accounts (money just sitting in family bank accounts) ballooned to about $2.5 trillion. At the same time, consumers awaited the “all-clear” like so many racehorses awaiting the bell and the starting gates blasting open. Concurrently, according to the Federal Reserve, as of mid-2022, household wealth had increased by nearly $25 trillion, even after accounting for the significant equity price declines in the first half of this year, most of which were borne by the top half of income earners, who had also benefitted disproportionately. We all know that too many dollars chasing too few goods explain inflation in every Inflation for Dummies crib sheet. How did supply keep up with demand as American family bank accounts swelled and quarantines finally eased? It didn’t! Not by a long shot.

Covid pulled the plug on production almost everywhere, bringing economic activity to an abrupt halt. Unfortunately, reinserting the plug into the economy isn’t like plugging in a living room lamp. Nothing picks up where it was shut down. With everyone avoiding crowded airports and train stations, demand for automobiles skyrocketed. Non-electric automobiles can require supplies from as many as 25,000 suppliers; remember, even auto-part suppliers need their own chain of suppliers. That’s why used car sales went through the roof, and new car deliveries were almost non-existent.

Suddenly there was a critical shortage of just about everything, especially computer chips essential for manufacturing today’s automobiles. What were people doing during the lockdown? They were talking on their cellphones, working on their laptops, and watching a lot of television. What do those products demand? A lot of computer chips. As the old saying goes, for want of a nail, a kingdom was lost. For lack of a chip, the automotive industry was, for all intents and purposes, also temporarily lost. How’s that for a belly punch to the economy? And that’s just one industry that shut down.

Simultaneously and very abruptly, just about everything ground to a halt. Airlines stopped flying, and restaurants and retailers lost virtually all their customers, as did most of the industries that supplied them. The world hadn’t seen anything like it during the lifetime of nearly anyone alive today. Tens of millions of workers were suddenly and without warning idled, and overnight, the unemployment rate in America went from a near-all-time low of 3.5% to 15%.

So, what else could go wrong to disrupt a world economy struggling to get back on its feet? Oh yes, Russia invaded Ukraine, putting tremendous pressure on the food and energy markets. Given all that has gone wrong, all the shutdowns, all the disruptions, and perfect storms, we’re in remarkably good shape.

Mostly, we did the right things. The Fed slashed interest rates to just about zero and began purchasing massive corporate debt to pump liquidity into the market, as the government distributed enormous cash relief throughout the economy.

So yes, in this game of presidential musical chairs, the Biden Administration takes the heat for the inflation the nation is experiencing. Still, inflationary pressures were pretty much “baked-in” even before the current Administration took office. History may eventually judge that more money was distributed to American families and businesses than was necessary. The country, perhaps, erred on the side of distributing more rather than less. The pandemic was historic. So was our success in managing its economic ramifications.

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