The recovery is already occurring, we don’t need more stimulus.
The Consumer Price Index has predictably jumped up 2.6 percent the past twelve months, and up 0.6 percent in the month of March alone as oil, gasoline and piped natural gas prices have rallied, according to the latest data from the Bureau of Labor Statistics, amid massive injections into the U.S. economy by Congress and Federal Reserve, which have helped create almost $5 trillion of new debt since Jan. 2020.
So far, prices are stabilizing to where they were pre-Covid, with the current upward price movement following massive price decreases last year during the Covid recession that saw the price of oil go below zero in April 2020 as demand collapsed and supply sat idle for months. In the meantime, the value of the dollar soared to record highs and U.S. treasuries’ interest rates went to less than 1 percent.
Prior to the Chinese coronavirus hitting U.S. shores in mid-January 2020, the price of oil was at about $63. Today, it’s at $60, more or less where it started. Similarly, the value of the dollar on a trade-weighted basis has settled back to where it started, now at 113.5 as of April 9, compared to 115 mid-January 2020. It had reached a peak of 126.5 in late-March 2020. And, 10-year treasuries are trading at 1.6 percent, close to last year in mid-January when it was 1.7 percent.
That’s quite a wild swing, and that alone should probably advise that Congress and the Fed tap on the brakes after a $5 trillion borrowing binge the past year or so.
Instead, after the $2.2 trillion CARES Act, the $900 billion phase four and President Joe Biden’s $1.9 trillion Covid spending bill, Congress and the Biden administration are lining up yet another $3 trillion infrastructure spending bill.
This is where if Keynesian economics created the most prosperity, the most jobs and the least government dependency compared to the alternatives, then we’d all be Keynesians.
However, in the 1930s, the 1970s and the 2008-2010s, during bad recessions, and during good times, too, the single most important factor to job creation appears to have been the relative strength of the dollar and whether prices were stable, and not necessarily government spending.
In the Great Depression, the problem was deflation but in the 1970s, it was inflation. Both resulted in high unemployment.
The financial crisis and the Great Recession of 2007-2009 was a classic boom to bust: Prices of housing and commodities including oil were soaring amid the cheap dollar, leading to the crash and then deflation. Trillions of dollars of fiscal and monetary stimulus later, and it would not be until 2014 that all of the 8 million jobs lost would be recovered.
In the current recession, 25.3 million jobs were initially lost when labor markets bottomed in April 2020, and 17.5 million of those jobs have already been recovered, according the Bureau of Labor Statistics household survey.
Keynes advised fiscal offsets to drops in aggregate demand that today in the U.S. are largely already baked into the cake, with $5 trillion in new debt and counting. When the latest $1.9 trillion Covid spending package hits the debt, that number will rise to almost $7 trillion.
To a certain extent, this is what usually happens in recessions. When joblessness increases, government spending automatically increases because of increased unemployment claims and use of food stamps.
But the relative strength of the dollar appears to be a stronger predictor of where unemployment is going.
On the gold standard, following World War I, the dollar and other currencies including the British pound were far too strong and could no longer be maintained, and were causing deflation to set on in the late 1920s. After the economy crashed, unemployment was already high but it went to the moon in 1931, the same year that Britain finally left the gold standard.
Herbert Hoover clung to the gold standard at its most untenable moment and took the GOP with him in 1932 and 1934, when Republicans were wiped out almost to the point of extinction politically. Hoover sat by idly as unemployment soared, reaching 11.2 percent by the end of 1930, up to 19.2 percent by the end of 1931, up to 25 percent in 1932 and peaked in March 1933 at 25.4 percent. It was not until after the U.S. departure from gold in June 1933 by Franklin Roosevelt that the unemployment rate finally began coming down.
Similarly in the 1970s, as the U.S. left the gold exchange standard, unemployment topped 9 percent in 1975 as inflation peaked at more than 12 percent annually. Eventually in the 1980s, as inflation stabilized amid record high interest rates, the unemployment rate came down, too.
Overall, this advises price stability above all to keep unemployment down. If the dollar gets too strong or too weak, it’s not good, whether correlating spikes in the dollar’s value to bouts of deflation, in 2015-2016 and again in 2020 as the dollar reached an all-time high.
Then, starting in June 2020, after the dollar peaked, we saw substantial weakening of the dollar throughout the rest of the year (probably engineered by Fed QE but also Treasury warehousing), and during that period more than 16 million jobs were recovered.
If Trump had insisted on a strong dollar to fight imaginary inflation when prices were in fact dropping, he would have made the same mistake Hoover made in the early 1930s when his Fed strengthened the dollar at the same time unemployment was rising. Franklin Roosevelt ended up making the same mistake too after coming off the gold standard in 1933, Franklin Roosevelt repegged the dollar to gold in April 1934, albeit at a higher price, and within a few years, deflation and dollar strength led the way to the double dip recession of 1937-1938. Trump did the opposite.
When the dollar strengthens like it did in 2020, and unemployment soars, the U.S. government resorts to borrowing and printing more money, flooding U.S. treasuries markets, which is exactly what happened under Trump and now again under Biden. Now, even today, with all the spending, the dollar is once again slightly strengthening in 2021, taking a little steam out of the oil rally earlier this month. Could deflation set on again?
Now, whether increasing spending is necessary to beget a dollar weakening cycle is controversial, but what’s important is that even as prices have appeared to stabilize and unemployment is dropping, Congress is still looking to spend and print trillions of dollars more. But history shows the premium should be put on price stability, not inflation. The recovery is already occurring, we don’t need more stimulus.
Robert Romano is the Vice President of Public Policy at Americans for Limited Government.