Heritage Explains


The real story on what’s happening—and ways to get us back on the right track.

We are hearing the term used all over TV, and in discussions about where the U.S. economy is headed. Stagflation. So what is it? Is it here? How do we deal with it? On this episode, Joel Griffith joins us to build on our inflation conversation (the prior episode), and give us the real story on what's happening—and ways to get us back on the right track.

Tim Doescher: From The Heritage Foundation, I'm Tim Doescher, and this is Heritage Explains.

Doescher: This year we've been focusing a lot on an issue that hasn't been a big deal for many years, inflation. For the most part it's always here, but it doesn't have as big of an impact as it's had this year. It's a real consequence to real people, real cost and real loss. But recently we've added a word to this discussion that deserves a bit of time, especially for people like me who weren't alive in the '70s. It's the S word.

>>> HERITAGE EXPLAINS: The Real Story Behind Inflation

Clip 1: A lot people are jumping on this and saying, "All right, we had a sputtering jobs report." We have companies beginning to warn about how that's going to impact their bottom line and we have prices running rampant. Does that sound like anything to you? Well, a lot of people of a certain age, I'm way too young to remember of course myself, they harken back to the days of Jimmy Carter when we had something called stagflation, a slowing economy but prices going just the other way. They were soaring. Could we be looking at that right now?

Clip 2: The reason that stagflation is such a concern or that economists get so worried about it is because we're talking about a slowing economy. So at the same time consumers are suffering from the effects of a bad economy, they're also paying more for goods and services. So essentially this creates a double whammy.

Clip 3: Omicron and supply chain crises and other things like Biden's spending may lead to stagflation.

Clip 4: Stagflation.

Clip 5: Jimmy Carter stagflation type moment.

Clip 6: Stagflation.

Clip 7: Stagflation.

Clip 8: Stagflation.

Doescher: Yeah, so this is definitely something we need to look into further, especially with recent GDP numbers reflecting much slower growth, and of course the incredible inflation we're all experiencing each day when we reach for our wallets. With those two things, as we've already heard, we at least need to be familiar with stagflation. On this episode our pal Joel Griffith is back. He's a research fellow in the Institute of Economic Freedom here at The Heritage Foundation. He's going to introduce to us, and for those of us alive in the '70s, reintroduce to us stagflation. Is it here? How long? What do we have to do to get back to normal? As Washington D.C. continues to debate massive spending bills that only drive us deeper into debt, printing more and more money, what does that look like? 

Doescher: Okay, Joel, here we are. It's creeping up again, another term, another thing that we have to deal with here in the economy. That of course is stagflation. You're seeing it in headlines all over the place. And I felt like we saw this in March and April of this year with inflation, and we wanted to bring you in for that to give a little bit of a definition of it and what to look for. And now here we are, inflation is here for sure, and we're starting to see the headlines. Are we headed to stagflation? Now, I just wanted to start out here with a definition that I compiled through a bunch of definitions online. And what I could gain from it is there's three things that make up stagflation. One, stagnated economic growth, two, high unemployment, and three, high inflation. So where is that? Is that a good definition to start from? Where would you hop in there?

Joel Griffith: Yeah, that's a good definition. There's not a scientific way to define this necessarily, but stagflation is this concept of having prices that are rising faster than what we've become accustomed to in combination with slower economic growth or even depressed economic growth.

Doescher: Okay. So let me say this. So we had GDP numbers that came out recently that said 2% growth, and that's coming out of the pandemic. So in a normal year 2% would be okay. But we were expecting much more than that, so that probably is lending to people saying, "Oh, stagflation is coming," kind of a thing. Is that right?

Griffith: Yeah, that's right. We have now a fully year of prices that have been rising close to double digits, close to 9% year over year. And at the same time we've seen our economy, which was rapidly recovering from the pandemic shutdowns, we've seen that growth really slow down. And what we've ended up as a result over this last year, you've seen real wage growth decline.

Doescher: Hm.

Griffith: As well as the economic growth has become slower, and as prices have risen real take home pay has gone down.

Doescher: Let's get into that just a little bit. Why aren't we recovering as quickly? I know we talk about, oh, shutdowns and things like that. I was in New York City last week, and it seemed open, and they were really strict with the lockdowns. Are we still saying that it's because of bad policy? What is causing us not to grow?

Griffith: No, it's a great question. And we're still suffering from the residual impacts of the shutdowns that occurred. We have not fully recovered from that. And in fact, across the world the reopening has not been fully accomplished. We see many countries that are actually going into new rounds of lockdowns. And even though we might not be interacting with that on a day to day basis, that has a real impact on our economy as well, because we have an interrelated global economy. A lot of the items that we use come from overseas, just as we export. And if you look at what's been going on across parts of Asia and Vietnam and China, some of those ports have been shut down recently. We've seen rolling shutdowns of factories. And then we still have that backlog of everything that occurred over the last year and a half. We're still suffering from those impacts.

Griffith: And you mentioned New York City, and yes, even though much of New York, compared to the shutdown they're resuming some normalcy ....

Doescher: Some.

Griffith: There are still a lot of restrictions in place. It's actually impacting not just the healthcare market where you have nurses being fired for not vaccinating.

Doescher: Yeah.

Griffith: It's impacting the service sector, it's impacting consumers as well, because many consumers aren't permitted to go to work because they have not been vaccinated. And then you have individuals that aren't able to actually participate in the economy. So we're still suffering from those COVID related policies right now, even though we've largely reopened in the United States.

Doescher: It's funny, I was reading this week, the Fed came out, and basically they say, "Hey, this is not anything that, we've got to be worried, but this is because of supply chain issues. This is because, all these things that we're seeing, the prices, we don't want to freak out too much here because this is a supply chain thing." But I'm not sure that's all there is here. That might not be the whole picture that we're painting. And the other thing that I want to say that you can build on is, why do we have these supply chain issues in the first place?

>>> HERITAGE EXPLAINS: Supply Chain Woes

Griffith: Yeah, well, without a doubt supply chain is a big part of the problem. We have trouble right now, shipping items from overseas to the United States. We're having issues actually shipping within the United States. And I'd love to unpack some of that because a lot of that's related to environmental and labor policies in the state of California that impact all of us. So yeah, the supply chain issue is a problem, but what caused the supply chain problem to start with? Well, a lot of that were these COVID policies that we're still recovering from, the distancing requirements, scattering the shifts even at the ports, which incidentally in New Jersey, for instance, that did not get back to normalcy until the summer of this year.

Griffith: So we're still suffering from that. But our government exacerbated these problems as well here and across the world by suppressing the manufacturing process, putting in restrictions on the shipping process in the name of COVID. And at the same time you had governments here in the United States especially, but overseas, ramping up demand for goods that actually were not available by borrowing and printing money. So that's compounded this supply chain problem.

Doescher: You cover the Federal Reserve so well, Joel, and I wanted to say, so the US Federal Reserve said that it would end its pandemic era bond purchases in March and pave the way for 3/4 percentage point interest rate hikes by the end of 2022. That was the headline. Now, as a cynic, and you can unpack that a little bit, but as a cynic I'm kind of dubious to what that is. But is that a necessary move considering all the money that was printed to keep us floating through the pandemic? Is that something that's good, or is this going to exacerbate the problem?

Griffith: Yeah. Well, over this last year and a half the Federal Reserve has made it easier for the federal government to spend far beyond means.

Doescher: Yeah.

Griffith: The Federal Reserve printed well over several trillion dollars, and a lot of that was directed to purchase government debt. Once the federal government has those newly created dollars in hand, they're able to allocate that throughout the economy. And a lot of people are downplaying the impact that that has had on prices, but it has been part of the reason why prices have risen. In fact, it's not just overall consumer prices. By stoking demand, by helping the government borrow, they've bought other assets as well. You had the Federal Reserve print money digitally to buy up a lot of mortgage bonds over this past year and a half. And it's part of the reason why you've seen housing prices spike, which isn't even fully factored into the inflation rate, yet we all feel that.

Griffith: Same thing goes with, another effect of this with the Federal Reserve printing money to buy up other assets, a lot of that, investors that sold assets to the Federal Reserve, they took those funds and bought stocks. It's one of the reasons why the equity markets right now are about 30%. They're valued 30% larger than they were before the pandemic, even though the economy is basically the same size. That's in part because of Federal Reserve policy. So they've played a role in increasing overall prices, in inflating the stock market bubble, and in spiking the cost of housing.

Doescher: Wow.

Griffith: The Federal Reserve is partially responsible for all of that.

Doescher: As we look at the term stagflation, we see op-eds popping up all over the place. And it's so funny, because I wrote a question basically the same way that I wrote this question back in April when we talked about inflation. We're seeing experts all across, "Is inflation here? Is inflation here?" And now, "Is stagflation here? Is stagflation here?" All this stuff. What I wanted to ask you, because again, we're not looking into a crystal ball here. We see things as they are. We call balls and strikes here. If we were to carry on the path that we're on right now, is a stagflation scenario likely to happen?

Griffith: Well, we're definitely increasing the risk of it.

Doescher: Okay.

Griffith: And here's why. This goes far beyond just the Federal Reserve. And so the Federal Reserve, as you mentioned, is going to lower the amount of assets they're purchasing, basically the amount of money they're printing, they said they're going to do that. But this goes far beyond that. If you look at what's been coming out of the Biden White House on what's already been passed by Congress and what's proposed, there's so many policies that are being put in place that are going to constrict the supply of goods and services. Things like energy restrictions, restrictions on fossil fuels. Even if you look at the food system, you would think, "Well, food, that's not really impacted by government." Well, yes it is, because there's a lot of environmental restrictions placed on where farmers can grow crops, what kind of fertilizer they can use. There's a whole agenda within the United Nations that were part of on the agriculture front.

Doescher: Yeah.

Griffith: And then you've got the restrictions that are being placed on labor, the assault on right to work, and then you have California, which regardless of what the federal government is doing, California is making it very difficult for truckers to operate within the state. And there's so much inefficiency just in that. And these are all problems that look as if they're going to become worse as the current administration really puts in place a slew of policies that are going to make it more difficult for businesses to produce things. And the last thing you want to add with that, on the tax side, the taxes are being proposed to go up on business. And when you do that, that means you have less capital available to actually purchase the equipment that's necessary to make us more productive, produce more things. So all of this combined is increasing the threat of slower long-term economic growth.

Doescher: It's incredible. You know, we said it before, we'll say it again, inflation, what did Milton Friedman say? Is always in every way a monetary phenomena caused by what? Caused by government. It's caused by government. And the tentacles of government which you just went over is exactly what he was talking about, I believe.

Griffith: Yeah. And when you look at what's being proposed, all the spending, it's not just that your taxes might increase, because there's other ways to pay for this besides taxing to pay for it. You can borrow or you can print. But the bottom line is at the end of the day, when you have the federal government spending more as a percentage of the economy, that means that the government is choosing more how to allocate our economic resources. It's less control that we have as individuals. And oftentimes that is reflected in either higher prices or prices that are higher than they would have been.

Griffith: And that's something that gets lost in this inflation debate, is we've gotten used to this 1% or 2% annual growth in prices as if that's normal. That's just nature. No, it's not. That's the government robbing us of the gains that we would realize in productivity. So we're all celebrating because our wages go up 4% and prices went up 2% and we see a slight increase in our standard of living. We need to start to asking ourselves, "Well, how much more would our standard living be increasing if the government didn't rob us from a lot of those gains in productivity with that inflation that occurs almost each and every year?"

Doescher: Okay. So we're coming up on an election year. There's a lot of speculation that Republicans are going to take majority in the House and potentially in the Senate even, which opens the door for new debates in policy. We could go on offense with our conservative ideas versus being on defense against their liberal ideas. However, my question to you is, where do you go? Where do you start to push back against all of these issues? What are some of those things? What would be your first steps in that?

Griffith: Well, we have to recognize that the problem we find ourselves in with this enormous federal debt and a growing federal government, this is a situation that's been caused actually by bipartisanship, often. It's been Republicans and Democrats that have been responsible for much of the explosion of federal spending, even going back last year during COVID. A lot of these enormous spending packages were actually passed with broad bipartisan support. Now, the current administration is trying to make this higher spending permanent and grossly expand the power and control of government. There's a big difference between the parties on that.

Griffith: But when it comes to the size of government, this is going to require a real commitment to rein that in. And that means, one of the proposals that we've talked about is having a, when we're talking about raising the debt ceiling, which we just did again ...

Doescher: Again.

Griffith: If we're going to continue raising that debt ceiling, there has to be a real commitment to things such as having a revenue cap as a percentage of GDP, to ensure that we don't just tax in order to pay for the bigger amount. Let's have an actual revenue cap.

Doescher: Which would mean basically the amount of money we take in, we are not going to spend more than that amount that we take in.

Griffith: Yeah.

Doescher: Okay.

Griffith: You have a debt limit in conjunction with a revenue limit. Because over time the cap-

Doescher: It's like what Dave Ramsey said that I should do in my own personally. Don't spend more than you take in.

Griffith: Because we do not have a revenue problem in this country. The amount of tax revenue coming in over the last few decades has consistently exceeded population growth and the inflation rate.

Doescher: Sure.

Griffith: It's that we keep spending more relative to that growth. So we have to get that under control.

Doescher: Right.

Griffith: And it means too that political leaders are going to have to do a better job explaining to constituents why it is that these programs that people seem to want, such as the more child tax credits, childcare, Obamacare, insurance subsidies, they need to do a better job of explaining why it is that even if your tax rate on paper doesn't increase, why your economic future will be harmed. And that takes some explaining, and that's why it's helpful with your podcast that you're explaining these concepts so that we can understand how this impacts us beyond just the bottom line and our 1040 that we file.

Doescher: Joel, I hope that stagflation, if it is here or if it's coming, I hope it doesn't keep us from being able to sit at a bar and enjoy an adult beverage or a cup of coffee and continue being good friends. And you are a really good friend of mine, and I'm so grateful for you being here with us today.

Griffith: Thank you, Tim.

Doescher: We did it. We talked about stagflation as our first episode of 2022. Starting off with a bang, baby. Thank you so much for listening. Go ahead, hit that like button, that share button, or leave us a comment wherever you listen to this podcast. And if you do leave a comment, maybe Michelle Cordero will read them in a British accent. Who knows? Be awesome, though. Regardless, she's up on the next episode and we'll see you then.

Heritage Explains is brought to you by more than half a million members of The Heritage Foundation. It is produced by Michelle Cordero and Tim Doescher, with editing by John Popp.