The debate over whether we’re actually in a recession has been as illuminating as most spin jobs for bad news.
The Biden administration has been flailing on multiple fronts for several months now, producing a job-approval recession for the president. When that happens, it’s awfully tempting to force faux-nuance and legalism onto what previously were straightforward matters – such as the rule of thumb that two consecutive quarters of economic contraction indicate a recession.
This much we know: The economy shrank by 0.9% from April to June, after contracting by 1.6% in the first quarter of 2022.
Going backward isn’t going forward. But most important is what comes next, and whether we’ve learned from what’s already taken place.
To understand both, we need to talk about inflation. That is the primary culprit for our don’t-call-it-a-recession. But inflation typically signals an overheated economy, not a struggling one. What gives?
Inflation is eating into household budgets, leaving less money to spend on non-essentials. Reflecting this, inflation-adjusted personal disposable income fell another 0.5% in the quarter after shrinking by 7.8% in the first quarter. Disposable income was actually higher before adjusting for inflation, as was personal income overall due to wage increases. So inflation is the problem.
Getting a raise doesn’t feel like much of a win if you’re spending all of it, and then some, on the same things you were buying before.
Investments of all kinds, including in private inventories, declined as a result. That is a bad omen, because it means businesses expect consumers to continue holding back.
For those who point to strong employment numbers as a reason the economy isn’t actually in recession, investment declines suggest wages and jobs are next on the chopping block.
Now we come to what’s next. The policy response to inflation is key because policy largely created it.
Two common deflections on this point are the war in Ukraine and supply-chain disruptions. Yes, the war has affected everything from the obvious (fuel and grain) to the obscure (the neon gas needed to make the computer chips missing from automobiles which are otherwise ready to sell). But inflation was already at 7.5% in January, more than triple the Federal Reserve’s target rate, well before Russia’s late-February invasion.
As for supply-chain disruptions: Yes, they’re a problem. But they’ve been a problem for two years now, including while the economy grew rapidly. And they were exacerbated by one of the main policy responses to the pandemic: the way Washington flooded the economy with (borrowed) dollars.
That flood meant demand surged without supply increasing – and in some cases, despite supply decreasing. More dollars chasing fewer products and services will push prices upward. That’s Economics 101.
That’s why it’s distressing to hear leaders in Congress hail a couple of new spending measures as cures, one of them perversely titled the Inflation Reduction Act.
Congress has previously appropriated hundreds of billions of dollars that are yet to be spent. In Georgia, for example, the American Rescue Plan Act allocated $4.8 billion to the state government, plus money for schools, local governments, individual taxpayers and others. The state initially received only half of the money and still hasn’t found a way to spend it all. The other half arrives soon – on top of a surplus of the state’s own revenues, and new federal infrastructure funding – and most allowable ways of spending the money will likely worsen inflation.
Now Congress has appropriated hundreds of billions of dollars more, threatening to offset whatever price-calming effects the Fed’s recent interest-rate hikes might have. This is like turning a fire hose on a man who’s bailing out a flooded boat.
Policymakers have a hard enough time making economically sound decisions in the best of circumstances. It’s harder still when times are tough, and all the more so when times are tough because of their previous decisions.
It’s virtually impossible when they demonstrate they learned nothing from their mistakes.