OPINION:
The American economy is headed for stagflation as surely as Joe Biden’s Robin Hood Keynesianism has followed Donald Trump’s structural growth compass into the White House. Here, history is instructive.
The day after the 2016 U.S. presidential election, I appeared on CNBC with the futures dead red down and confidently predicted strong growth and 25,000 on the Dow. To stimulate GDP growth, the Trump administration would hit four points of the policy compass: tax cuts, deregulation, cheap energy and rebalanced trade.
We quickly added higher defense spending and increased international arms sales to the Trump structural growth drivers. These six drivers would deliver real GDP growth consistently above projections — and yes, we easily blew past 25,000 on the Dow.
Today, the Biden administration is reversing all Trump growth policies — from cancelled pipelines and terminated arms deals to a waning defense budget. With more Keynesian stimulus on the way, taxes will go up directly through legislation or indirectly through inflation.
In normal times, this Trump-to-Biden transition would simply mean a reversion to the old Obama-Biden administration mean of sub-2% growth and stagnant real wages. It is with the complications of the pandemic where the “flation” part of stagflation rears its ugly head.
The pandemic from China has struck at the three main pillars of urban prosperity around the world — high-rise office buildings, mass transit, and hospitality and entertainment. The result: A vast army of unemployed service sector refugees.
Pandemic flight to the suburbs has also made American cities like New York and Chicago more vulnerable to violence. “Defund the police” movements have exacerbated skyrocketing urban crime rates.
The essence of high structural unemployment in this pandemic-fueled urban decay is the spectacle of millions of unemployed Americans without the skills to fill millions of job openings. Expect wage inflation in select sectors. Paradoxically, expect real wages to fall in the aggregate under the weight of service sector refugees, open border policies, and slower Bidenomics growth.
On the demand side, it’s an unsustainable equilibrium to keep pouring trillions of dollars of Keynesian stimulus into the U.S. economy without paying the inflationary piper. If the Federal Reserve accommodates the fiscal stimulus by printing money, a falling dollar will drive up import prices. If the Fed refuses to accommodate, interest rates rise.
If the Biden administration raises taxes, that may help with inflation. Yet, it will contribute to slower growth — the classic Keynesian tradeoff.
Many investors have camped out in the stock market for the last several years not because they expect robust growth but simply because interest rates have been at or near zero, making the bond market relatively unattractive. All this turns on a dime with inflation and rising interest rates, with a stock market correction not far behind.
America’s woes will quickly ripple out into the global economy. Slower U.S. growth means fewer imports from the world — even as the U.S. exports its inflation through a weaker dollar. A stock market correction in the U.S. will be a shot quickly heard round the world.
There is a way out of a 1970s redux. But much of what must be done is simply orthogonal to the Biden ideology. Former President Trump’s six points of the supply-sider compass had it exactly right; but like Mr. Trump, these policies aren’t coming back any time soon.
I might be wrong about stagflation if Federal Reserve Chairman Jerome Powell is right in claiming inflation will be “transitory.” However, with all the structural damage I am observing from the pandemic coupled with the Biden administration’s war on energy and deregulation, I think Mr. Powell will be dead wrong.
As a former Trump official and one of the architects the Trump economic program, I feel like I’m watching a slow-motion train wreck. Yes, it’s a tragedy. But it’s also a self-inflicted wound.
Will somebody at the White House please wake up — instead of just being woke?
• Peter Navarro is the former assistant to the president for trade and manufacturing during the Trump administration.
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