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Stagflation Will Be Biden’s Legacy

By Peter Morici

June 7, 2022 – First published at Washington Times)

My inbox is stuffed with articles about the prospects for stagflation, but slow growth and runaway prices are descending on America right now.

Sooner or later, dumb policies catch up with a society. Wars, natural disasters and pandemics often instigate the reckoning — just ask the crack logicians marshaling the Russian army.

The West is smack in the middle of such a calamity too.

As this column has argued, short of a punishing recession Americans will be lucky to see inflation at 4%, never mind the Federal Reserve’s official target of 2%.

Broken supply chains 

The war in Ukraine and sanctions have broken supply chains. Along with Climate Change induced heat, drought in some places and excessive rain in others, this is driving up food prices.

Land use planning is predominantly state-driven, and in the American West, it mostly promotes new industry and urbanization at the expense of agriculture. The national interest in sustaining an affordable food supply and exports to a hungry world be damned.

If the Biden administration is aware and prepared to mitigate, I am at a loss for evidence.

In Ukraine, the Russians have longer-range artillery, air superiority and the capacity to bomb Ukrainian cities into oblivion, but President Biden won’t give Kyiv the missiles and intelligence to target critical infrastructure and leaders inside Russia for fear of escalation.

Dicey business

Nuclear and chemical weapons are a dicey business and could backfire — Russian President Vladimir Putin would achieve a shock effect but no lasting advantages, as we could destroy the Russian fleet in retaliation. But shortages of Ukrainian wheat, sunflower oil and corn, as well as Russian fertilizer, threaten to break fragile food import dependence in the Middle East and Africa and turn sanctions on their head.

By blockading Ukrainian ports, Mr. Putin is driving up global food prices and imposing more costs on the West than the West imposes on Russia.

All of this will take massive amounts of capital to just mitigate that could otherwise be better spent on R&D, infrastructure and other productive investments.

COVID-19 and the war are slicing U.S. and European growth by about 1.5 percentage points — that’s well more than half the pre-pandemic pace.

Underarming the Ukrainian army

Yes, Virginia, underarming the Ukrainian army is inflationary and also stifles growth.

Chicken is expensive because COVID-19 and working from home have driven up demand. Swine flu is pushing Asian consumers from pork to poultry, and avian flu has cut chicken flocks. Yet, Mr. Biden demonizes as monopolies the four large American meat processors.

Before investing in more chickens and processing facilities, these firms must worry about the Justice Department coming for them. That won’t bring down prices, but it will sure slow growth.

These kinds of mistakes repeat in other sectors.

Permanent student debt relief

Mr. Biden is weighing permanent student debt relief but not reforming universities whose tuition has rocketed on the jet engines of the federal student loan program. Universities will continue to waste capital by preparing students for jobs that don’t exist — or not teaching them to think at all.

Mr. Biden’s ballyhooed infrastructure plan so favors the union and social justice movements, much of the $550 billion in new money will be wasted. Amtrak will continue to move too slowly, highway congestion will grow, and American businesses will be saddled with more delays.

Progressive policing policies that beget unsafe cities are keeping people from returning to offices. If those are still occupied a few days a week, not much capital will be saved to pay for additional computers, printers and home offices in the suburbs.

Slower growth courtesy of the AFL-CIO and Black Lives Matter.

Starving the petroleum industry

Starving the petroleum industry for leases will continue to raise oil and gas prices and smother demand for other goods, especially among the nearly half of households with incomes less than $75,000. Already they are fleeing Walmart and Target for dollar stores.

A handful of large money managers like Blackrock, State Street and Vanguard — aided by the radical environmental movement — are forcing incoherent, growth-killing environmental, social and governance standards on American industry.

Exxon, Shell and the like are peopled by petroleum and mechanical engineers of various sorts. They know about as much about solar technology as the Yale Law School does about nuclear physics.

 

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

 

Image courtesy of Geralt at Pixabay

High Inflation Becoming Permanent

Americans Should Gird for a Long, Tough Battle with Inflation

By Peter Morici

May 25, 2022 – First published at washingtontimes.com)

Americans should gird for a long, tough battle with inflation.

Paul Volcker is fondly remembered as the Federal Reserve chair who slew double-digit inflation in the early 1980s. Often forgotten is that for 10 years, through prosperity and recession, the annual rate of increase in the consumer price index averaged about 4%.

For the decade between the Global Financial Crisis and COVID-19, the pace was a bit less than 2%. But that was a historic anomaly driven by more-intense globalization, the buildout of Chinese manufacturing and competition forcing businesses to minimize costs through economies of scale and wage arbitrage.

Problems with over-optimization have been laid bare by the semiconductor industry. Fires in two factories — in Japan and Germany — would have caused a global chip shortage even without a pandemic.

Shortfalls in production

China’s mishandling of COVID-19 is causing shortfalls in production from low-tech manufacturers in Vietnam who rely on components from the Middle Kingdom to behemoths like Apple and Toyota.

The Shanghai COVID-19 lockdown makes apparent the vulnerabilities inherent in the heavy reliance of supply chains on China, but it did not create them.

More pandemics are almost certain, and it’s clear we have over-globalized — at least as it concerns dependence on a Communist Party dictatorship that is paranoid about western influence.

Sinopharm is an inferior vaccine, but it will be a rainy day in hell before Beijing puts the health of its citizens first and asks the West for large quantities of Pfizer and Moderna vaccines. And it would rather cast its population into isolationist purgatory than admit to the folly of its Shanghai policy.

Treasury Secretary Janet Yellen calls the great globalization rethink friend shoring.

Diversify sources

Apparel retailers like GAP buy more from Central America. The U.S. government seeks to diversify sources of lithium, rare earth minerals, medical supplies, semiconductors and several other products away from China and Taiwan.

All of this will make America more secure, but is terribly costly and will stoke inflation.

Climate change is raising temperatures and causing droughts and floods in the western United States and around the globe. These cause shortages of affordable grains, vegetables, dairy and cooking oils.

The disruptions caused by the Russian invasion of Ukraine, sanctions, and resulting export embargoes in India for wheat and Indonesia for palm oil heightened the adverse consequences of rising global temperatures but hardly created them.

NATO’s policy of avoiding direct confrontation with Russian and limiting weapons and intelligence supplied Ukraine prolongs the war — perhaps to a stalemate — making crisis prices in petroleum and food markets increasingly permanent.

Biden policies

The private sector is moving out of fossil fuels as quickly as emerging battery technology and scarce and vulnerable supplies of lithium and other critical materials will permit. However, Biden administration policies that limit U.S. petroleum producers’ access to leases needlessly raise gasoline and natural gas prices and stoke inflation.

A more sensible approach would encourage solar and wind power, and electrification of transportation and buildings while still enabling U.S. oil and gas supplies.

Saudi Arabian Crown Prince Mohammed bin Salman and Russian President Vladimir Putin are both ruthless autocrats. U.S. energy policies senselessly make difficult and more expensive diversification of European and American sourcing away from Russia, Saudi Arabia and other unfriendly states.

President Biden’s refusal to engage the U.K. and EU in genuine free trade negotiations and reenter the Trans-Pacific Partnership weakens our staunchest and most effective allies. It drives Asian nations to question the durability of the U.S. commitment to counter Chinese expansionism and limits commerce and supply chain investments that would optimize friend shoring.

Restrictive zoning

Domestically, higher interest rates may slow but will hardly break the secular rise in housing prices and rents. It is driven too much by restrictive zoning for land close to cities, work-from-home and the resulting demand for more residential space, and the crime wave begotten by defunding the police and prosecutors who won’t indict looters and even violent criminals.

Yes, Virginia, soft on crime is inflationary.

The pandemic inspired U.S. and European governments to overspend and print too much money. Witness the nearly $3 trillion in additional post-pandemic bank deposits and cash held by U.S. households and nonprofits that keep consumers spending even as interest rates rise.

Rearming the West to counter Chinese and Russian expansionism must be paid for by higher taxes, less spending on social programs or bigger budget deficits enabled by central banks printing more money.

More inflation

My bet is on more money, more demand and more inflation.

But our Federal Reserve chair tells us the money supply does not matter. He’s aiming for a soft landing when 11 of the 14 tightening cycles since World War II were followed by recessions. His words don’t inspire confidence.

We are likely looking at 4% rather than 2% inflation over the next decade.

 

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

 

Photo by nick olson on Unsplash

America’s national interests require tolerating some bad actors around the world

But we can choose the devil with whom we deal

By Peter Morici

April 13, 2022 – First published at washingtontimes.com)

The loadstar of American foreign policy should be the security of our citizens and assets abroad, national prosperity and the promotion of human rights.

This requires accepting tradeoffs, domestic policies that minimize vulnerabilities and acknowledging we can’t antagonize every autocrat on the planet.

The West is celebrating a reinvigorated NATO and stiffened resolve among Pacific allies, but the American posture remains timid and defensive.

The conflict in Ukraine is morphing into a war of attrition that Kyiv is challenged to win.

Porous sanctions

Western sanctions are porous, and Russian President Vladimir Putin won’t yield. Renault is resuming production in Russia, Pepsi is supplying Lay’s potato chips, cheese and other “essentials.” Moscow’s central bank can work through the 20% of Russian banking still free to do business in the dollar.

Mr. Putin’s domestic approval rating has climbed to 83%. If Russian citizens can acquiesce to the execution of Ukrainian children, we are morally rudderless to enable their access to daily necessities.

By denying Ukrainians fighter jets and other air defense systems necessary to defend the sky and offensive weapons to take the war to the Russians, we invite a false peace. Mr. Putin slices off Donetsk and Luhansk, we de facto acknowledge Russia’s annexation of the Crimea, and Moscow plants operatives further east to subvert Ukrainian authority.

If confronting Mr. Putin provokes a Russian engagement with NATO forces, President Biden should make plain that the U.S. Navy would sink Russia’s fleet, seize its commercial ships at sea and blockade its ports.

Otherwise, Mr. Putin will learn from his mistakes, rebuild his military and improve its logistics and ultimately take aim at Sweden, Finland or the Balkans.

Sharp sword

Diplomacy is always the first option, but when dealing with terrorists like Mr. Putin, a sharp sword lends authenticity to all the flowery prose.

The West isn’t disengaging from China — foreign investment and trade are booming, and its technological progress and modernization continue apace — and the American military in the Pacific needs restructuring to deter China from taking Taiwan.

Taiwan’s defense can be hardened with American anti-ship missiles, advanced sea mining technologies, anti-aircraft systems and improvements in its army’s readiness.

Former Under Secretary of Defense Michele Flournoy has written persuasively that U.S. naval and air readiness in the Pacific should create a credible threat to “sink all of China’s military vessels, submarines, and merchant ships in the South China Sea within 72 hours.”

President Xi Jinping

Then Chinese President Xi Jinping might think twice about crossing the straits to win a place in the pantheon of Chinese heroes.

Unfortunately, the world is not conveniently divided between spheres of democratic states — NATO and Japan, Australia and a few other allies in the Pacific — and belligerent autocracies — Russia, China, North Korea, Saudi Arabia, Iran and several others.

Too much of the world’s oil is locked up in belligerent states and in a nether space — Iraq, Kuwait, Nigeria, Indonesia and others — between democracy and its adversaries. We must cultivate the nonaligned, choose among lesser evils among the belligerents and get out of oil as fast as we can.

Mr. Biden’s greatest sin against facts and reason has been to work tirelessly to stifle the U.S. oil and gas industry.

Drilling here and supplying Europe doesn’t have to slow Mr. Biden’s goals for electrifying the American road and a low carbon economy. It does mean we won’t have to foolishly remove the Islamic Revolutionary Guard from the U.S. list of terrorist organizations to get a nuclear deal and oil from Iran.

Choose the devil

We can’t escape the fact that we could drill full out in the United States, and the West would still need Middle Eastern oil and gas — especially with Russia handicapped from participation. But we can choose the devil with whom we deal.

The region is irrevocably divided between Sunni Muslims led by Saudi Arabia and Shiite Muslims led by Iran. And freed of sanctions, Iran would become a greatly enhanced terrorist state, an economic powerhouse beyond oil and with twice the population, a many times greater menace than Saudi Arabia.

China is buying 1.8 million barrels a day of Saudi oil but we supply the Patriot missiles the kingdom needs to defend against Iranian-supported Houthis attacks and have the technology it seeks to diversify its economy.

We can’t oppose the Saudi war with Iranian supported fractions in Yemen and vehemently criticize Mohammed bin Salam’s domestic policies, and then ask him to pump more oil, nudge him to treat dissenters and women better, and join with us in the Abraham Accords to build a more peaceable region and credible answer to Iranian aggression.

Adults recognize there are lots of bad actors in the world. Americans must get tougher with the worst of them and tolerate those least threatening to best serve our national interests.

 

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

Image courtesy of hosny_salah at pixabay.com

The six tragic errors the U.S. made that permitted Russia’s war on Ukraine

The U.S. and its Western allies appeased Russia and China, weakened their defenses, and summoned aggression in Eastern Europe and the South China Sea

By Peter Morici

March 24, 2022 – First published at marketwatch.com)

History will mark the Russian invasion of Ukraine as a devastating attack on the peaceful community of democracies. And that America and its allies—so inured with a sense of moral and systemic supremacy—committed six strategic errors that summoned aggression and ultimately let an invasion degrade into a humanitarian tragedy.

Economic appeasement

First, at the end of the Cold War, America and its allies opened the Western market economy through the World Trade Organization and other mechanisms to Russia and China following the thesis that participation in free markets would instigate democratic reforms.

Instead, Russia and China transformed socialism into forms of crony- and state-capitalism that empowered ruthless, autocratic regimes.

Russian President Vladimir Putin maintains his military machine and internal repression apparatus with revenues from oil, gas and other commodity sales to the West. Chinese President Xi Jinping can rule without elections by delivering export-driven prosperity and imposing an Orwellian system of behavioral control.

Military appeasement

Second, the West appeased Russia when it invaded Georgia and the Crimea and, after establishing a nascent democracy, the United States abandoned Afghanistan to the mercies of the Taliban.

Third, appeasing Russia by limiting NATO forces and positioning only defensive weapons in the Baltic states, Poland and southeastern Europe. Putin still created a fable about NATO’s aggressive intensions, appealed to Russian cynicism, and invaded Ukraine.

Now, absent NATO kinetic intervention—specifically, an allied-enforced no-fly zone—or providing the Ukrainian government with jet fighters, Putin won’t leave Ukraine empty-handed.

Fourth, appeasing Russia by not equipping Ukraine with offensive weapons. Moments after crossing its frontier, if Ukrainian President Volodymyr Zelensky could have rained missiles on approaching Russian forces and hit several strategic targets inside Russia, then Putin’s adventurism would have looked much less appealing to his military and countrymen.

Energy dependence

Fifth, American and European energy policies are fundamentally flawed. Fossil fuels will remain necessary for years, because wind and solar power can only be built out as fast as new battery technology falls in price.

Russian energy leverage over Europe is potentially very short term. Europe has adequate LNG terminals to import much of the gas it needs and could build capacity within three years to eliminate Russian natural-gas imports.

Sixth, American troops in Germany and the still modest NATO contingents stationed in states bordering Russia remain an inadequate deterrent, and U.S. forces have grown terribly vulnerable.

At his Feb. 24 press conference, President Joe Biden was asked what Putin meant when he referenced his nuclear weapons in his speech justifying seizing Ukraine. Biden said “I have no idea.”

Missed was that Putin also brandished “several cutting-edge weapons” that could defeat any adversary. Russia and China possess hypersonic missiles and antisatellite and cyber weapons that could crack an American warship in two, disable the navigation systems of the U.S. fleet and wreak havoc on the American power grid.

The United States spends $768 billion on defense—Russia $154 billion and China less than $250 billion. I doubt Defense Secretary Secretary Lloyd Austin could adequately explain why U.S. forces lack comparable weapons.

Strategic failures

Like other top-level Biden appointees, he’s good at forming task forces, producing vapid reports and satisfying the diversity and inclusion requirements of progressives in Congress and the bureaucratic interests of his departmental employees.

However, the Pentagon’s November Global Posture Review failed to offer an adequate strategy to reconfigure and modernize American forces in the Pacific to the China challenge and missed Ukraine badly.

How long would it take for American isolationists on the hard left and right to win the argument to let Russia have the Baltic states or Poland if Putin made the lights flicker and paused transit systems during a Manhattan rush hour or smashed an abandoned Midwestern factory with a missile.

Before jumping in patriotic fervor consider how much support Europeans could offer. Germany, the continent’s largest NATO member, can hardly muster an army.

For the moment, the political climate in Europe has moved in favor of beefing up NATO defenses and finding alternatives to Russian natural gas.

However, effective deterrence and hardening of economic resilience will require substantial new spending when Germany and the broader continent are grappling with the huge costs of modernizing their aging industrial base.

It’s going to take firm diplomacy to ensure the Europeans muscle up enough, but the endurance of continental resolve ultimately may prove wanting. And the Biden administration lacks the political will to stare down the green lobby and encourage U.S. shale producers to manufacture and export the additional LNG that Europe needs.

Presidents Putin and Xi can accomplish at lot more mischief before Inauguration Day 2025.

 

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.