Inflation Plus Recession Equals Stagflation

We talk a lot about economic developers facilitating the creation of high-wage jobs and partnering with educational institutions to offer programs equipping students with skills needed by employers. This work requires a lot of effort and energy at the best of times. Economic developers are needed now more than ever during a time when wages are not keeping up with inflation, we are getting poorer and the economy is slowing. We need them to encourage companies to relocate to our communities, make large capital investments, and create more jobs. One Okaloosa EDC does this for Okaloosa County. At any given time, One Okaloosa EDC is working with many prospective businesses considering relocating to Okaloosa County.

A little recap of recent history:

After two years of economic crisis due to Covid which included shutdowns, mandates, and severe unemployment, many businesses closed for good. Florida opened up sooner than most states and we are doing better economically than many states. Florida’s unemployment rate is 2.7%, Okaloosa County’s rate is 2.3%, and the United States’ rate is 3.5%.

In the U.S. we’ve had a shortage of workers and supply chain problems. Employers have had to raise wages and offer signing bonuses to get employees. Many people dropped out of the workforce. Many have wanted to keep working remotely.

Then inflation hit. We are at a 40-year high of 8.5% inflation. Many economists think it is actually higher because of food and housing costs which are not counted by the government anymore when calculating inflation rates. They should be since those are what people consume.

You know the price of everything has gone up, way up. Filling your car’s gas tank continues to be shocking. The “Family Size” box of Raisin Bran has gotten smaller and there are fewer tissues in the Kleenex box but both cost more. That’s called “Shrinkflation.”

The Federal Reserve had lowered interest rates so much they couldn’t lower them anymore so they “printed money.” The Chairman of the Federal Reserve, Jerome Powell admitted in a 60 Minutes interview in 2020 that the Fed had been printing money.

Scott Pelley: Fair to say you simply flooded the system with money?

Jerome Powell: Yes. We did. That's another way to think about it. We did.

Scott Pelley: Where does it come from? Do you just print it?

Jerome Powell: We print it digitally.

Many economists, financial experts, and just plain observers predicted years ahead of time that we would suffer inflation because of this monetary policy. When inflation started to rise the Federal Reserve was telling us inflation was transitory or temporary. Other government officials were saying inflation was not even happening. Of course, we now have evidence to the contrary.

The Federal Reserve’s policy since 2020 is to do nothing about inflation until they see inflation rising above their two percent target rate for a while.

Influential economist Milton Friedman maintained that flooding the economy with money without a corresponding increase in output value in the economy makes the money worth less and prices rise causing inflation.

A recession is when there is an overall drop in economic activity as a result of a drop in the Gross Domestic Product for two consecutive quarters. That has always been the definition.

We are having both at the same time and that is called stagflation. There is real suffering as a result. There has been a huge increase in families going to food banks for example.

Increasing productivity helps combat recession. Raising interest rates, as the Federal Reserve is doing now, can fight inflation. Raising interest rates slows down the economy. We are in a vicious cycle.

Many believe the Federal Reserve needs to alter its policies and use its tools to prevent high inflation and not react to it. They shouldn’t purchase so many mortgage-backed securities with printed money which encourages real estate lending but prevents other business investments because banks have limited resources. More investment in other types of business would help productivity. They need to tolerate some unemployment and according to Forbes, not run the economy so hot.

Stock market analysts are now saying that the days of the Federal Reserve responding and implementing policies to limit the stock market decline are over.

We don’t know where all of this will lead or how it will end. But focusing on the positive effects of economic developers actually doing something to help local economies is something we can all support