Borrow-and-spend U.S. keeps Tue Jun 12, 6:20 AM ET
Over the past quarter-century, a generation of Americans has come of age without the crippling effects of stagflation - a stagnant economy coupled with high inflation. To this generation, double-digit jumps in consumer prices and double-digit unemployment rates are as unthinkable as the sun rising in the west.
Today's economy, after all, is supposed to be knowledge-based. Oil prices mean little to a Google or Goldman Sachs. Cheap imports can hold down prices. And labor costs can be kept in check by technology-driven efficiency gains or outsourcing jobs. Stagflation - like disco, leisure suits and the Ford Pinto - is a thing of the past.
Or is it? Rising prices around the world suggest the era of low inflation might be coming to an end. Countries as large as China and India are seeing higher labor costs. Meanwhile, prices for everything from gasoline to cellphones are being pushed up by robust demand. This year's projected inflation rate of 4.8% in the USA, based on the first four months of the year, would be the second highest since 1981.
Some inflation is inevitable. But, if it gets out of control, it erodes the value of savings, discourages long-term investments, causes interest rates to soar and often leads to recession. This makes the nation's fiscal policies all the more inexplicable.
President Bush and Congress are seemingly doing everything possible to ensure that inflation takes hold. They are pursuing what economists call "stimulative" fiscal policies. That is to say, they are borrowing like there is no tomorrow and plowing that money back into the economy in form of retirement benefits, defense contracts, bridges, government salaries, farm subsidies and more.
This year, the government is projected to spend about $244 billion more than it collects in taxes. Since 2002, it has overspent its income by $1.8 trillion. The numbers are actually a lot worse when the liabilities of Social Security and Medicare are factored in. These types of deficits constitute the kind of government pump-priming that might help in a deep recession, but not in today's economy.
To some degree, central banks and private debt markets can fight inflation by pushing up interest rates. Higher rates mean consumers have less money to spend on cars, homes and such. It also means that companies have less to invest. With less money sloshing around, demand for an array of products and services drops, which can curb price hikes.
But as anyone who tried to buy a house or run a business during the stagflation era knows, sky-high interest rates are undesirable shock therapy. With consumer prices, particularly energy costs, rising at worrisome levels, Washington policymaking looks like a bad rerun of That '70s Show. |
