Three Ways to Get Serious About Inflation

Heritage Explains

Three Ways to Get Serious About Inflation

President Biden insists that our economy has gone from being “on the mend to on the move.” So what is the real story with our economy?

We are all feeling the pressure of the economy. But President Biden insists that our economy has gone from being on the mend to on the move. So what is the real story with our economy? On this episode Joel Griffith paints a clear picture, and explains the three things Congress must do to get back to prosperity. 

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

Doescher: We are all feeling the pressure of the economy. We keep saying it here, things are bad. In fact, a recent Gallup poll shows that only 20% of Americans think the economy is good or excellent. That's 20%. That means 80% aren't necessarily happy. I wonder what President Biden thinks. Here he is over the last couple of weeks.

President Biden: We look at the economy today, it's clear we've made enormous strides and our plans and our policies have produced the strongest job creation economy in modern times. When I came to office, we took a different approach across the board. With the American Rescue Plan and other actions, we started to grow the economy from the bottom up and the middle out. And as I see, everything across the country is, as I go across the country, our economy is gone from being on the mend to on the move.

>>> How the Fed Has Set Our Economy Up for Disaster

Doescher: From being on the mend to on the move. I guess if he keeps saying, it's true. But not according to our checking accounts, Mr. President. In fact, it seems like the economy is getting worse each day. So let's get right to the truth, let's paint a picture of where this economy is. Joel Griffith is a research fellow here at the Heritage Foundation. He's a frequent guest of Explains. You know him, you've heard him, and you know that he knows this economy inside and out.

Doescher: On this episode, he's going to go through the three things we should do to get serious about inflation and the things we can do to make this economy better. I'm here, Joel's here, you're here, next.

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Doescher: Joel, in your recent piece, it's called Three Things Congress Can Do to Get Serious on Inflation. You say, "If Congress stops the federal spending spree, stops subsidizing the housing market, and stops the war against workers and energy", that's not really an easy task there. But anyway, you say, "Inflationary pressures will ease significantly." And I want to reiterate that is a heavy load that we are carrying right now.

Joel Griffith: It's a very heavy load. And it's a load that, frankly, over the last few years, maybe even the last few decades, it's been both Republicans and Democrats that have seemed very reluctant, to put it generously, to actually address. And if you look at just that first component, that spending component, we went from spending about $4.8 trillion annually, which is a lot of money.

Doescher: That's a ton money.

Griffith: That's about $50,000 per family of four per year. We went from spending that to more than $7 trillion in 2021.

Doescher: Geez.

Griffith: And pretty much the entirety of that increase, nearly all of it, came from borrowing from the future or printing it.

Doescher: Yeah. We're just printing and moving decimal points on spreadsheets in the Fed. But I do want to go line by line here. Prices, like you say, they're up big time in almost every area to track. So the simple question is, are our wages increasing enough to pay for this increase in prices?

Griffith: No, our wages are not keeping up with the increase in prices. And of course, there's always an exception to the rule, but the majority of American families are finding that their grocery bills, their gas bills, their rental costs, everything is increasing sometimes at a multiple of what their wages are increasing at. If you look at just chicken or beef or toothpaste, all of this is increasing at double digit annual rates.

Doescher: Yeah. And again, if money is worth less, if there's more of it in the economy, it's worth less. And if employers aren't increasing by enough to keep track with how much money is devalued right now, we're really in big trouble.

Griffith: And when you talk about that increase in money rather than talk about the billions and the trillions, we'll just go something very basic. The overall money supply, the M2 money supply has increased by about 50% since the start of the pandemic.

Doescher: Oh my gosh. And again, this is just being ... Are we seeing a bunch of dollar bills being shipped out kind of a thing and dumped into the economy, like dumped over Texas from a plane, they just dump money down. How is this working? How are the mechanics of this working?

Griffith: We're increasing that money supply primarily digitally. Of course, hard currency is a part of it, but the big increase here has been our central bank printing trillions of dollars digitally and then buying up government debt. The government then goes ahead and spends that money and the investors that sold their bonds to the government, they now have cash. And those investors took that cash and they bought stocks and they bought NFTs and they bought crypto. They bought a lot of assets with those funds. And now we are feeling the impact of those rising prices.

Doescher: So they took that money and they put it into the market. And that's why we saw over the last, I don't know, few years, this incredible shoot in market ... You look at the Dow Jones, it was constantly going up. And that wasn't because of the great economy, we were going through COVID. It was a huge hit to our economy, but you're saying that's because they just were injecting it into the market, basically.

Griffith: A big part of it was the fact that investors had those proceeds from selling the bonds. They had those proceeds in hand. But another part of this too, was the Fed keeping the interest rates artificially low. And if you want to buy stocks, or if you want to trade on margin, which in effect borrows against your assets, you were able to obtain a much lower interest rate than in years past to go ahead and borrow money to put into the market. And to give you an idea how big that explosion in asset prices has been on the upside, even with the stock market correction that we have now. And I think if you've looked at your 401k, you're probably not that happy, but the overall valuation of all the publicly traded companies in this country, it's still about 20 something percentage points higher than when COVID began.

Griffith: And we got to ask ourselves, does our economy feel, is it actually acting as if it's 20 something percent larger than it was before the shutdowns. And the answer anecdotally and the answer by the data is no. But somehow the market is so capitalized at 20% greater. Well, that's just another example of these policies inflating asset prices. Everybody loves feeling a little rich when these things are, when these assets are increasing, but it's really painful when it shrinks and it's not just painful emotionally, it has an impact in the economy, because then people start spending less because they realize that wealth was paper wealth.

Doescher: I was talking with a friend the other day and I said, Hey, look, choices are going to be made eventually where people are going to either live the same way they've been living the last five, 10 years and they're going to have way less money to do that, or they're going to go into credit card debt or they're just going to have to stop living the life that they've been living and make serious decisions. And I think that's happening right now. I think people are realizing how much this pinch is. So just go into it a little bit. Talk about the pinch, but also talk about how much longer are we going to see this pinch.

Griffith: Yeah. I wish where politicians had the common sense economics that you just articulated, because if you look at the surge in consumer spending during COVID and then following COVID, well, a lot of that was directly related to the fact that we had our federal government distributing generous unemployment benefits, child tax credits. And in addition to that, most of those who are listening received stimulus checks either electronically or actually in the mail, whether or not they needed the money. So what we saw early on, we saw the savings rate increasing to generational highs because there were fewer places that you could actually spend the money.

Doescher: Yeah. You couldn't go anywhere, just locked down.

Griffith: But then as our politicians at last allowed us to return to freedom, individuals, families started spending down all those artificial savings from all that artificial income from the government. And we saw a surge in demand. We started seeing the surge in prices and now we've seen something very troubling develop. We've seen the savings rate plunge as people have drawn down on those savings. And we've seen what you referenced, we've seen a surge in credit card debt and credit card spending just in the past few months. Consumers are finding it necessary to borrow from their future because now these prices are so much higher than their income.

Doescher: It's a humbling thing to change your lifestyle when you get used to live in a certain way. And then because of irresponsibility here in Washington, DC in large part, you have to start making decisions that make you not live a higher level of life that you got used to living. So let's continue on this track. Let's go to another issue that you talk about in your piece. It's housing. And Joel, this is so stinking important. I want to park here just for a second. I saw mortgage rates are at, not all time highs, but highs that they've been in 40 years. Rents are up. Just give us a little bit a sense of what we are seeing when it comes to housing prices and that pinch.

Griffith: Yeah. Well, even before the pandemic began, we saw a steady increase in home prices. It was already beginning to price some people out of the marketplace, even with interest rates low. But for a time, very low, record low interest rates on mortgages. It masked this affordability problem. Housing prices were hitting newer highs in some areas, but people weren't feeling to pinch so much, because rates are so low. Well, what we've seen over the last year as the market is trying to adjust with all this government intervention, we have seen home prices continue to increase, and we've also seen mortgage rates increase, not just ... I want to say they actually mortgage rates have doubled. They've gone from 2.6 to 5.2 in the course of a year.

Doescher: Almost overnight. Yeah. I mean, it's crazy.

Griffith: What that means to the typical person, if you're looking to buy just a median priced home, a mortgage payment on just a typical home to get into that house has increased more than 50% in the past year or so. It is squeezing, not just squeezing the budgets of families, but it's actually making it difficult for many families to buy a first home. If they have a child or two, to get a bigger home. It is disastrous.

Doescher: Let me just stop you there because you talk about the mortgage payment rates and you said in your piece mortgage payment to income ratio, you can explain that. But it hit 35% in February, that's the bleakest affordability since 2008. So that means, what, 35% of people's income is being spent on housing right now, not on the future, not on building up the house and making it better, but the mortgage itself, 35% is going to that.

Griffith: That's right, just to get into a typical home. So if you make $6,000 a month, well, you can expect to spend about $2,200 a month to get into that house. And what that also is meaning that a lot of people are finding that they're going to have to rent longer, but you're not necessarily getting off the hook by renting either. Rental prices, in the middle of the country, not just in Miami and LA and New York and all the big urban areas that people usually like to flock to, in the middle of the country, places like Missouri and Ohio. These prices in many locales are increasing by 15 to 20% year over year. And in a lot of cities, it's far worse and it's not uncommon to see 50% increases in rental costs just over the past year.

Doescher: Let's move on to work and energy. That's number three in your list. And when I hear work, especially after the last couple years that we've had, I think about generous unemployment benefits that were given out to people who could be at work, basically, shutting down the economy, keeping people at home, not moving. That's probably a big reason why we have supply chain crisis too. But let's just talk about work, we had the OSHA mandates with vaccine mandates, people worried about that. Are you seeing people returning to work or are they still getting this unemployment benefits from COVID stuff? Give us a picture for what that looks like.

Griffith: Early on in the crisis, the big draw down on labor, if you will, were all the generous government benefits. Now, many of those now have subsided. We're not getting the extended unemployment benefits any longer. And we do see the labor force participation rate creep up, but it's still near generational lows. And if you look at the labor force participation, the percentage of the working age population that is either working or looking for work, we still have close to 2 million people that seem to have just disappeared out of the labor force.

Doescher: Wow. Wow. Devastating.

Griffith: And this is a problem, not just in that, it puts more pressure on businesses. It also means that there's a lot of people that aren't getting the work experience that they need to have, as often, those are people without advanced education, they learn on the job. But it also means for all of us, it means that we have far less quality when it comes to engaging with businesses. I think we've all experienced that whether we're at a store purchasing something or at a bar, a restaurant. We've all noticed that service coming down. It's not just anecdotal. It's showing up in the data. Millions of people have disappeared from the labor force.

Doescher: Disappeared. And then they hired people who aren't as qualified as they could be. Not to say they couldn't be, but when you're thrown in a situation that you're not qualified for, you're basically set up for failure. And that seems to be what's happening here. Let's talk just a little bit. This one, I think everybody feels, especially not living in a big major city, which is energy. We always talk, and you and I have done episodes on the gas prices, home energy costs, that kind of thing. They're just increasing like crazy. And my question more is, again, we're talking that we're going from being on the mend to on the move. Are you seeing positive steps in the right direction into fixing this energy crisis where we're paying so much more for gas and home energy costs?

Griffith: We see right now our daily output of oil is about 10% or so less on a daily basis than it was prior to the pandemic, So we have a shrieking of supply and a big part of that is that our companies, they're fearful of putting in investments to produce more, to explore more, because this current Biden administration, people high up have made it very clear that over the medium term, not just long term, over the medium term, they want to put these fossil fuel companies out of business. So if you're a company and you've got billions of dollars, you have to decide, do I invest this or return it to shareholders? If you think that this government is going to shut you down, you would be crazy to invest those dollars. And this administration, the rhetoric, it's not just the rhetoric, that's an attack on energy. It's actually their actions.

Griffith: On day one, what did Biden do? Killed the Keystone Xcel oil pipeline.

Doescher: Big signal.

Griffith: They've held up natural gas infrastructure developments, natural gas pipeline developments. And on the day that gasoline hit all time record highs, the administration put a million acres off limits for the time being in Alaska for future development.

Doescher: Wow.

Griffith: And the only bone that Biden has tossed us when it comes to supply is releasing nine days worth of oil from the strategic oil reserve.

Doescher: The strategic oil reserve, which is just, wow. Yeah.

Griffith: Nine days worth.

Doescher: It's like a drop in the bucket. Now let me ask you something here, because I want to move to less criticism and more proactivity. And that is, let's say there's a change in guard. Let's say that there's a policy shift here in DC in the coming year. What is the first thing that a different policy lens we would start seeing? What would be the first thing that you would suggest doing to correcting the course here, to getting us back on the right track? We remember prosperity. It wasn't that far away from us right now. So where do we get back to that? What's what are some of the first steps?

Griffith: Maybe if there's a change in guard with more fiscal conservatives in Congress, perhaps they can stop these bipartisan negotiations that end up resulting in more money printing and more borrowing. Think of the truly dollar plus package that was passed not even what a year ago.

Doescher: I like to be clear here. You're so right. It's so important to point out this is a bipartisan problem.

Griffith: Yes.

Doescher: This spending, these blank checks, essentially. No budget, no discipline whatsoever. This is bipartisan.

Griffith: We sowed the initial seeds for this back in 2020 when we had, actually, a Republican president and we controlled, we had more Republican seats in the House and we saw these spending bills passed with giant majorities. And people here at Heritage and elsewhere, other economists as well, warned that this was going to have negative consequences going forward. And Congress still passed it. This was a bipartisan agreement to send stimulus checks to people, to extend unemployment benefits. And it was an administration that was actually Republican that put in place an eviction moratorium.

Doescher: Sure.

Griffith: That we also know is damaging. Now, I think that the current administration has made it far worse. They've doubled down on those mistakes and they've tried to make those mistakes permanent, where at least a year and a half ago, we saw the administration beginning to reign that in, because I think people were beginning to recognize the potential danger. This administration has doubled down, made it far worse. And there is no excuse at this point because we know that the pandemic has ended here.

Doescher: Joel, you are just such a great resource here for us, for all of the folks listening at home or in their cars. I just wanted to thank you for stopping in here. We do this a few times a year. We check in on what's happening in the economy and it's so beneficial to us. So thank you for tracking this and being with us this episode.

Griffith: Thank you, Tim.

Doescher: And just like our old friend, Rush Limbaugh used to say, "Joel is great at making the complex understandable." Thanks again for doing that episode for us, Joel. Now, if you want to read his piece, head over to the show notes. I'll also link to prior conversations where we've gone deeper on other aspects of the economy as well. We'll catch you next time.

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.