'Build Back Better' will disrupt economy, cause more inflation
January 12, 2022
During the late 1970s, American families experienced stagflation — a combination of economic stagnation and significantly higher inflation. By the summer of 1980, unemployment hit 7.8 percent and the economy was actually shrinking.
On the year, inflation spiked 12.3 percent.
Some fear that today’s slowing economic growth (2.3 percent annualized last quarter) and the steepest price hikes in 40 years portend a return to stagflation.
Real weekly earnings have plummeted more than 6 percent since the middle of last year, and the cost of living eclipsed wage increases. Dramatic price hikes in housing, rent, vehicles, gasoline, and some food staples have fueled the feeling that something in our economy is amiss.
Government mandates, regulations, spending, and borrowing are largely to blame for this painful increase in the cost of living. These governmental actions suppressed the supply of goods and services while spurring demand.
Social distancing, quarantines, and shutdowns diminished the ability to produce goods, provide services, travel and deliver merchandise. School and child care closures made it impossible for many parents to work. Meanwhile, the elimination of work requirements for some welfare programs, generous unemployment benefits, and rounds of stimulus checks disincentivized work.
Although jobs are in ample supply (openings remain near an all-time high of 10.5 million), 4 million fewer people are working compared to just two years ago. Many have dropped out of the labor force altogether. The proportion of the working-age population working or actively seeking employment is now under 62 percent — the lowest it’s been since the 1970s, when women were entering the workforce en masse. To fill open positions, employers are offering higher wages. These rising wages reflect a government-created shortage of willing workers rather than an increase in worker productivity. Indeed, productivity plunged more steeply in the last quarter than at any time since 1947.
This disconnect of wages from productivity squeezes the bottom lines of businesses while still being insufficient to keep pace with inflation. Businesses are forced to pass these rising costs on to customers even as the customers endure subpar service stemming from unfilled positions.
It’s not just labor that’s in short supply. Shortages in manufactured goods — including household appliances, vehicles, and televisions — stem largely from a shortage of microchips needed for numerous steps in the manufacturing process. Government COVID-19 policies caused unpredictable, often abrupt changes to supply and demand. This created a domino effect in the manufacturing process.
President Joe Biden claims his “Build Back Better” tax-and-spend package will ‘transform the economy.’ In reality, it represents an embrace of radical, socialist policies that will exacerbate increases in prices, labor shortages and supply chain disruptions Americans are facing.
Make no mistake, the enormous expansions of government spending being proposed would cost families dearly. Americans will pay either through direct taxation, higher borrowing costs (as the government competes with businesses for available capital), or the hidden tax of inflation as the central bank purchases government debt.
And inflation can be the most destructive and painful tax of all.
— Heritage Foundation