Real economic woes

Minnesota’s economic train falls off the tracks.

In March, the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index had risen by 7.9 percent over the previous year, the fastest year-on-year rate since January 1982. Stripping out volatile food and energy prices to get “core inflation,” prices were up 6.4 percent over the last year, the fastest rate since August 1982. The situation was particularly acute in the West North Central Division, which includes Minnesota. The rate was 8.2 percent, driven in large part by an increase in natural-gas prices, which was 16.1 percentage points above the increase nationally.

Wages aren’t keeping pace with higher prices. The same day the BLS announced the inflation numbers, it also announced that real, inflation-adjusted, average hourly earnings had fallen 2.6 percent over the past year, and that real average weekly earnings were down 2.3 percent.

Americans are buying less with their money. They are worse off. Economist Teresa Ghilarducci advised cutting back on veterinary treatments and eating more lentils in lieu of pricier meat.

So, DFL Chairman Ken Martin’s March 24 commentary in the Duluth News Tribune, in which he claimed that, economically, “Things are finally on the right track,” was astounding. If this is his idea of the right track, I’d hate to see what the wrong track looks like.

Martin seemed to construct his argument by cherry-picking various statistics of doubtful relevance and attributing them to the passage of the American Rescue Plan. We were told Minnesota’s unemployment rate fell from 3.7 percent in March 2021 to 2.9 percent in March 2022 thanks to the plan. But Minnesota’s unemployment rate was falling rapidly before its passage. Indeed, that figure for March 2021 was down 7.1 percentage points from the peak of 10.8 percent in May 2020. BLS data show that, over the course of 2021, the U.S. economy added 136,000 fewer jobs than the Congressional Budget Office forecast would be created without the rescue plan. In short, the American Rescue Plan spent $1.9 trillion and failed to create a single job.

The source of America’s current inflationary woes is no mystery. As economist Milton Friedman explained, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” From the fourth quarter of 2019 to the fourth quarter of 2021, the quantity of money increased by 40 percent. Over the same period, real Gross Domestic Product — or output — increased by just 3.2 percent. The amount of money to spend increased much faster than the amount of stuff to spend it on, so the price of that stuff was bid up.

The American Rescue Plan was partly responsible for this. By the time of its passage, U.S. GDP had already rebounded to 99.2 percent of its pre-pandemic peak; it simply didn’t need another $1.9 trillion dumping into it. Noting that the inflation rate in the U.S. is now above that in other countries, economists at the Federal Reserve Bank of San Francisco estimate that “fiscal support measures” like the American Rescue Plan “may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021.” The American Rescue Plan did more to boost inflation than employment.

To deal with inflation, we need slower (or no) growth in the quantity of money and faster growth of real GDP, or both. The solution to America’s macroeconomic problem lies on the supply side, and measures that “will increase our capacity to transport goods and tackle supply-chain issues” are welcome. But, as even the Washington Post points out, only about 20 percent of President Biden’s $1.2 billion infrastructure bill, passed in November, “would be used to fund roads, bridges, and other surface transportation programs.”

Reading Martin’s summation — that, “The facts are clear: Minnesota and America are moving forward thanks to President Joe Biden, Democrats in Congress, and the American Rescue Plan” — I’m reminded of that old Star Trek episode where the Enterprise crew is transported to a parallel universe where everything is the opposite.

Minnesotans don’t live in this parallel universe. They live in the real world of rising prices and falling real incomes. That is why about seven in 10 Americans say the nation’s economy is in bad shape, and close to two-thirds disapprove of President Biden’s handling of the economy, according to a recent poll from the Associated Press and NORC Center for Public Affairs Research. As election year pitches go, “You’re wrong, voters, things are actually great” is a bold strategy. Let’s see if it pays off.