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The Federal Reserve’s biggest long-term concern should be stagflation—a combination of persistent and unacceptably-high inflation coupled with nonplus growth.
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%.
Supply squeeze
The war in Ukraine and sanctions on Russia’s aggression have disrupted 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, and it mostly promotes new industry and urbanization at the expense of agriculture. As water supplies diminish, for example from the Colorado River Basin, cities will get what they need, and farms and ranches will become less productive even as prices for their products rise.
In Ukraine, the Russians have longer-range artillery, air superiority and the capacity to bomb Ukrainian cities into oblivion, but President Joe Biden won’t give Kyiv the missiles and intelligence to target critical infrastructure and leaders inside Russia for fear of escalation.
Driving up food prices
Nuclear and chemical weapons are a dicey business and could backfire—Russian President Vladimir Putin would achieve 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, Putin is driving up global food prices and imposing more costs on the West than the West imposes on Russia.
A stalemate or Russian victory would likely make sanctions on Russian agricultural products and disruptions in Ukrainian exports more or less permanent.
All of this will take massive amounts of capital to mitigate that could otherwise be better spent on research and development, infrastructure, and other productive investments.
COVID and the war are slicing U.S. and European growth by about 1.5 percentage points—that’s well more than half the prepandemic pace.
Other policy mistakes
Other policy missteps hamper growth too.
Chicken is expensive because COVID and work from home have driven up demand, swine flu is pushing Asian consumers from pork to poultry, and avian flu has cut chicken flocks. Yet, Biden demonizes as monopolies the four large American meat processors.
Cutting up chickens, pigs and cattle hardly requires occult knowledge and if prices were substantially elevated by monopolistic practices as opposed to tight global supply conditions, we should expect to see new producers entering the marketplace and slipping under the price umbrella created by alleged, widespread price gouging.
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.
Biden’s infrastructure plan heavily favors the union and social-justice movements, and much of the $550 billion in new money will not raise productivity. Amtrak will continue to move too slowly, highway congestion will grow, and American businesses will be saddled with more expensive and productivity-killing delays.
Progressive policing policies that beget unsafe cities are keeping people from returning to offices. If those are occupied a few days a week, not much capital will be saved to pay for additional computers, printers and home offices in the suburbs.
Starving the petroleum industry for leases will continue to raise oil
CL00,
and gas
RB00,
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
WMT,
and Target
TGT,
for dollar stores.
Incoherent ESG standards
A handful of large money managers—such as BlackRock
BLK,
State Street
STT,
and Vanguard aided by the radical environmental movement—are forcing incoherent, growth-killing environmental, social and governance standards on American industry.
Exxon
XOM,
Shell
SHEL,
and the like are peopled by petroleum and mechanical engineers of various sorts. They know about as much about solar technology as the English department at Harvard does about nuclear physics.
As demand for fossil fuels recedes, profits should be returned to shareholders so that capital may be redeployed to new, more-productive activities—including green energy—rather than forcing Big Oil to do things it knows nothing about.
Looking at how a few money managers can bully large corporations to foolish decisions, maybe Justice Department antitrust chief Jonathan Kanter should stop harassing Frank Perdue’s legacy and set his sights on BlackRock’s Larry Fink.
Most of these matters are beyond the reach of Federal Reserve Chairman Jerome Powell and his colleagues.
Inflation will persist, capital will be wasted and opportunities for more robust growth squandered until we get significant policy regulatory policy reform in Washington.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
