RECESSION, DEFINITION, REDEFINITION AND THE REALITY OF WHERE WE ARE AND WHAT TO EXPECT

RECESSION IS REAL FOR WAGE EARNERS

The definition and redefinition of recession during the recent inflation induced storm beating on the American economy should remind us that the original term for the field of economics was actually political economics. In the United Kingdom (Britain) the definition is simple – “two consecutive quarters of negative gross domestic product” (GDP). In the United States the economic wizards have chosen a more ambiguous definition – “a significant decline in economic activity spread across the economy, lasting more than a few months” with the National Bureau of Economic Research (NBER) as the final arbiter. With the upcoming midterm elections coming in a few months and the economy in an extremely vulnerable inflationary environment, the rhetoric is flying fast and furious. The Republicans and most conservative and centrist economists are taking the position that, unless proven otherwise, we are in a recession and the Biden Administration is taking the position that the two quarters of negative GDP that have occurred in first half of 2022 is not sufficient to call the economic morass we are experiencing a recession. Keep in mind that the worst inflation in over forty years that we have dealing with in 2022 is primarily attributable to excessive spending and money creation in 2021, in addition to a green agenda driven energy policy that has ignored the realities of existing technology and the scientific constraints that would help identify a truly optimal path to clean energy. If two quarters of negative GDP were to occur for any reason with a Republican party controlled Congress and a Republican in the White House, they would be singing the recession refrain with choral backup from the liberal media.

Against this backdrop of word spin, the American public faces a different reality. With all the parsing of words and stretching of definitions, it makes sense to look at recession through the most relevant lens. Consider the concept that recession, like beauty, “is in the eyes of the beholder”, without pondering the exact definition of recession. A vast majority of working Americans, whose standard of living is primarily dependent on their wages and/or salaries, were suffering months before the end of the second quarter, when two consecutive quarters of negative GDP were eclipsed. By the beginning of 2022, with record high inflation going full speed chewing up their take home pay, their recession already started. All the semantics generated by Biden administration and the media gurus will not change that reality. Note that the economic wizards who are responsible for identifying recessions and expansions have never ultimately identified a situation of two consecutive quarters of negative GDP to be anything other that a recession. To borrow wording from the left, the “recession deniers” are gleefully pointing out the extremely favorable jobs report as a defense for their position. They downplay the fact that the entire substantial jump in employment was the amount needed to catch up to the employment level at the end of the Trump term and the beginning of the pandemic. They totally omit the fact that the already inverted yield curve, which is one of the more reliable indicators of recession, substantially worsened.

In the last few days both the July consumer price index (CPI) and the producer price index (PPI) showed slight improvement, in both cases attributable to lower energy cost which is the most volatile segment (along with food) of both of these indices. The Stock market has viewed the slightly lower than expected CPI of 8.5% (drop from 9.1%) and the PPI with a drop of 0.5% as of the end of July quite favorably with all of the three major indexes (S&P, Dow, and Nasdaq) rallying. The hope of many stock market analysts is that the a 3/4 point federal funds increase will possibly be off the table in September and that a1/2 point be more likely. From the viewpoint of wage earners on an aggregate basis they received approximately 5.7% more nominal income in July than last year at this time which, unfortunately, translates into almost a 3%drop in real income (8.5%-5.7%). It is noticeable that a lot of attention is being paid to the head line CPI number of 8.5% and only brief mention is made that the core interest rate has remained constant at 5.9% (actually raised slightly). Core inflation which excludes volatile food and energy tends to be very sticky and moves much slower than the headline number. It is inconceivable that quality of living for middle and low income individuals has actually improved at all because, given that grocery, housing and healthcare prices increased during this period, the prices of much of their necessary purchases accelerated. It is notable that credit card debt is at an all time high and this will become a serious problem if it leads to a substantial increase in defaults. Big tech and retail corporations are trimming their workforce as consumer purchasing is continuing to contract, which will help their bottom line going forward. Clearly consumers are facing a recession far greater than portrayed by recent activity in the stock market.

The impact of the raising of the federal funds rate by the federal Reserve has a lagged effect on the basic economic indices. Both consumers and producers will increasingly feel the effects of rising interest rates over the coming quarters with another federal funds rate increase coming in September (2022). The absolute refusal of the Democrats to consider across the board supply side incentives to help resolve the inflationary supply and demand unbalance, rather than strictly depending on Federal Reserve actions which create demand destruction, falls hardest on the middle and low income tax payers. As the pundits and gurus in the Biden Administration agenda driven think tank celebrate the small drop in the headline CPI and PPI numbers, middle and low income individuals must wonder what the celebration is all about. And, with the Federal reserve continuing to raise the federal funds rate to tame inflation, which leads to less investment, fewer jobs and stagnant wages, there will be no celebrating for wage earners for a long time. It is apparent that many stock market analysts are hoping for a soft landing for the economy and, consequently, that market indices have already bottomed. Unfortunately, even though the stock market may have seen the bottom, a soft landing is most likely to occur if the Federal Reserve is willing to accept high ongoing inflation for an extended period of time, which means that middle and low income individuals’ real income will be depressed for the foreseeable future. Remember that as inflation starts to roll over, levels above the 2.0% target have historically been considered too high and that 6.0%, 5%, 4% inflation rates and so on, that will trumpeted as success, are not acceptable, and if inflation that is not adequately addressed this year is likely to raise its ugly head again in 2023 along with additional requisite Federal Reserve tightening and demand destruction.

In their going effort to duck reality, it is obvious that the Biden Administration is willing to say anything to obfuscate the inflation and recession mess they have created and not take the obvious steps to reduce the pressure on the working class tax payers they profess to represent. It is also obvious that they believe that the voting public is amazingly stupid. A recent statement being repeated by the Biden Administration spin masters and their salivating allies in the network and cable media is that July inflation was zero. The reality was that July year over year inflation was 8.5% in contrast to 9.1% for June. The fraud being ginned up by the Biden Administration is that they are portraying zero increase in inflation between June and July as zero inflation. They keep spending and creating deceptively labeled legislation that will do nothing to help the taxpayer.

WHAT TO EXPECT AND WHAT HAS BEEN IGNORED

In recent papers I have concentrated on identifying the errors that have been made by the Biden Administration that has led to the severe inflation the American economy is experiencing and consequent contraction that has occurred as the Fed takes the requisite steps to reign in the worst inflation in over forty years. For those who may be looking for a treatise identifying a magic bullet consistent with Keynesian theory that can cure our current economic ills, keep in mind that the aggregate (national) economy is a vast compilation of disparate industries, consumers and money hungry government agencies with different characteristics, and that the monetary and fiscal policies of the central government that interfere with free market solutions should be carefully weighed before implementation. Most of my critic has pinpointed economic policy blunders starting in 2021 noting that all of the demand and supply side stimuli implemented in 2020 were more than sufficient to bridge most of the negative impact of the pandemic shutdown on the demand side of the economy, and some on the supply side, leaving important issues such as supply chain issues to be worked out as the economy reopened. Given the immense amount of stimulus payments to individuals and businesses during the 2020 pandemic lock down, combined with a Federal funds rate of 0.00-0.24% and the resurgence of quantitative easing (continuing through 2021 and part of 2022), the economy was well supplied with money and liquidity going into 2021 (actually oversupplied). The continuation of quantitative easing in 2021 along with the agenda driven spending of the Biden Administration, which flooded the economy with more money, was a recipe for unprecedented inflation, especially when combined with the misguided war on fossil fuels which severely constrained gas and oil production spiking the cost of energy.

Instead of an esoteric cure or complex theoretical debate of the options available for economic recovery, the most intuitive approach should be to identify the set of monetary and fiscal policies that were the most effective economic drivers in recent history (last decade). Restricting commentary to economic solutions, the monetary and fiscal policies in place during the 2017-2019 period were generating healthy, sustainable economic growth with low unemployment and inflation. There is an almost universal acceptance of the concept that “if it’s not broken, don’t fix it”. Based on that premise, the logical fix for the economic issues plaguing the economy would be to copy what has worked. The overall economic policies between 2017 and 2019 to a great extent followed the supply-side policies consistent with Milton Friedman’s approach to free market solutions, with across the board tax cuts and the reduction of the regulatory presence in the marketplace. The return to the economic policies that were a success during the Trump Administration, however, will never be allowed by the agenda driven Biden Administration. The Covid 19 pandemic and the consequential lock down disrupted the economic growth path generated by the free market friendly environment of the Trump Administration. The consequential government stimulus related actions, as described above, consistent with Keynesian theory, prepared the economy for a healthy expansion starting in 2021. Unfortunately, the “change of presidential horses midstream” to an administration that has ignored main stream Keynesian, as well as, monetarist and supply side-side theory related to the cause and cures for inflation, and has been highly detrimental for the American economy, especially for middle and low income wage earners.

In many previous papers I have been unforgiving in my critique of hard core Keynesian blind adherence to only supporting demand side policies and cures for expansions and downturns, even in the face of stagflation. It is not been my intention to dismiss the basic tenets of Keynesian analysis nor is it my intention to blindly accept in every detail the Supply-Side and/or Monetarist positions. Depending on the existing economic climate at any one point in time the recommended course of action between the various schools of economic thought can be surprisingly similar. For example the moderate main stream Keynesian policy position in economic downturns is not to increase taxes of any nature, and in times of expansion especially with inflation risks not to increase transfer payments, or undertake expansionary fiscal policy (spending). In effect, the Biden Administration has undertaken monetary and fiscal policies that are not consistent with either basic Keynesian or Supply-Side theory, and is continuing to pursue inflationary agenda driven legislation, hidden behind the endorsement of a number of left leaning hard core Keynesian economists and the full support of the Democrat party.

Regardless of how our economy got to where it is, the reality is that inflation is presently at an unacceptable level in combination with a recession that will not realistically improve in the short run as the Federal Reserve hikes up the federal funds rate to tame inflation. In this conflictual situation all rational economists are in basic agreement that inflation must be addressed first, and the sooner the better. One would think that, in the meantime, nothing should be done by the Biden Administration to aggravate inflation, which would force the Federal Reserve to raise the federal funds rate even higher for a longer period of time, or pass legislation that will deepen the recession. An upcoming paper will review a large tax and spend piece of legislation passed by the Democrat party on a straight party line vote. Attention will be paid to the impact of this legislation on the American free market economy in the medium and long term, including all tax payers, and all businesses especially entrepreneurs.