There’s a political debate stemming from the recent softening of inflation.
As you might expect, last Friday, President Joe Biden baited Republicans by saying, go ahead, impeach me, because inflation has come down. Ha ha ha. Well, Mr. President, your impeach-ability has nothing to do with the lower inflation rate. Big reason for that, by the way, is all the corruption charges popping up like tulips in springtime. But that’s a subject for another riff.
If it’s the Federal Reserve tightening money supply and raising interest rates, that has brought the inflation rate down. Now, I wouldn’t get too cocky about it, Mr. President, because roughly 35% of voters disapprove of your economic policies. And mostly they’re referring to inflation. Think of this: Over the past 30 months, the level of consumer prices has gone up 16%. Grocery prices up 20%. Energy prices up 33%. And we’re checking on the prices of Rehoboth Beach mansions for you, Mr. President. Want to make sure your real estate wealth is intact?
Gasoline was about $2 when you were elected. It did jump to five bucks nationwide, but it’s running about $3.75 today. Just in case you wondered, sir, $3.75 is higher than two. And that’s really your big problem.
Now, I’m not sure inflation is dead altogether because we’re seeing a big rally in commodities and gold and oil. That’s recent. Last month or two.
But I want to raise a point that has nothing to do with politics, and that is the inflation rate can fall without putting the labor force out of work or driving up the unemployment rate. You can take a look at the chart from our pal David Dodson. It shows unemployment has stayed relatively low while year over year inflation has descended. There it is up on the full screen.
From 50 years or more, liberal economists have always argued that lower inflation requires high unemployment. It’s called Phillips curve. It’s not true. The evidence has never proven the Phillips curve. Recently, Federal Reserve Gov. Christopher Waller has been debating Larry Summers, former Obama and Clinton adviser. Summers thought the unemployment rate had to go to at least 5% to get inflation down. Waller said no, there’s plenty of job openings to mitigate labor force tightening. Well, he was right. Summers was wrong.
Lately, former Obama adviser and now Chicago Fed head Austan Goolsbee. He said the Phillips curve doesn’t work. Right. I’ve been saying that for my whole professional career. This guy, William Phillips, argued long ago, I think back in the 1950s, that lower unemployment would increase wages. Well, I think that’s true. But he never said rising wages perforce causes higher inflation.
Now, classical supply siders have always argued that inflation is a monetary problem. Go back to Nobel list Milton Friedman or Robert Mundell or , or even yours truly. A rising price level is a function of excess money created by the Fed. And you’ll know, it’s too much money when commodity prices, including gold, start rising rapidly or various bond market-based indicators of inflation go up.
Point is, more people working is a good thing. Lower unemployment is a good thing. With the right tax incentives, more people working produce more goods, which is anti-inflationary. All the gold commodity value the dollar steady. Produce more goods. You’ll get lower inflation with faster economic growth. That, by the way, is exactly what we need today. In the seventies, unemployment and inflation went up together. In the eighties and nineties, unemployment and inflation went down together. Think of that.
Problem here is Joe ‘Bidennomics’ is producing massive government spending, which may be responsible for as much as 45% of the recent rise in the economy, 45% coming from the government. That is not consistent with low inflation, nor is it sustainable growth.
All those deficits, debt borrowing could force the Fed to print too much cash, drive up commodities, drive down the dollar. In other words, Mr. President, you’re inflating. Well, the Fed is trying to deflate.
I don’t want to impeach you for that. You’ve got enough alleged scandals on that score. I just want to tell you the policy is unhealthy. So the future of this great country, that’s not an impeachable offense, but it’s going to lead to a long run American decline, which is tragic.
This article is adapted from Larry Kudlow’s opening commentary on the July 31, 2023, edition of “Kudlow.”