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The consequences of too much government involvement in the economy

At the beginning of May, the US consumer price index and the producer price index for April 2022 were published. On the surface, neither report was great news regarding America’s fight against inflation, but both showed progress in the fight, in our opinion.

The consumer price index rose 8.3% yoy in April, while declining in March from an 8.5% yoy increase. Monthly consumer inflation rose 0.3% in April, down sharply from 1.2% in March. The Producer Price Index, which shows the rate of increase in wholesale, or the cost of producers of goods and services, rose a surprising 11% yoy in April, but rose less than 11.2% in March. Monthly producer inflation rose 0.5% in April compared to 1.4% in March.

We regret to note that the silver lining to inflation may be short-lived as less than 2 weeks into May – US gasoline has set a new all-time national average price of $4.42/gallon while West Texas Intermediate Crude closed the day at around $107/barrel. Falling oil and gasoline prices in the second half of April were the main reasons behind lower prices for key oil-related consumer goods.

Important dates for April/early May

Positive and negative signs

President Joe Biden has spoken across the country about how well the US economy is doing. Judging by economic data and recent polls ranging from Politico and NBC to FOX News and Monmouth University, the President needs to double check his sources regarding recent claims about the current US economy’s performance.

In a Monmouth University poll conducted May 5-9, a whopping 79% of Americans said the US is going in the wrong direction, with just 18% agreeing with the direction the US is going. In the same poll, when asked to rate President Biden’s job performance, 57% disagreed while only 38% agreed. If you look closely at the Monmouth poll, a whopping 58% of Americans said they found it difficult or somewhat difficult to buy gas for their cars or groceries for the house.

We understand why Americans respond, on average, with gasoline to polls like the one conducted by Monmouth University
Price of $4.42/gallon on May 12 according to AAA, while it was just $4.09/gallon a month ago and $3.00/gallon a year ago. The average cost of groceries per household rose about 10% year over year in April, according to the Bureau of Labor Statistics.

For example, over the same period, meat increased by 13.9%, eggs by 22.6%, fish by 11.9%, milk by 14.7%, fruits and vegetables by 7.4%, and coffee by 13.5%.

Adding to higher gasoline and food prices, real wages fell 2.8% in April while airfares rose 18.6% for the month. Indeed, in our opinion, April’s consumer and producer price indices came with both good and bad news.

On the one hand, air travel, hotel and rental car businesses have improved dramatically since the 2020 pandemic, and millions of Americans have or will be taking much-needed vacations in the coming months. The bad news is that airfares are up 33.3% year-on-year in April, gas prices are up 43%, hotels are up 22.6% and rental cars are up 10.4%.

Current problems

We firmly believe that the US economy is the strongest, most dynamic, vibrant and resilient economy in the world. However, we believe the US economy is facing major economic headwinds and denying this makes neither political nor economic sense.

In late April, the Bureau of Economic Analysis (BEA) surprised most economists when it revealed in its advanced report that US GDP in the first quarter of 2022 was not only negative but had contracted by 1.4%. Considering we took some criticism last month when we hinted that Q1 GDP could be below 1% at the start of the year. In addition to Q1 GDP, we and most Americans are concerned about the following.

  1. More than 150 million Americans own stocks; US stock markets are down in 2022 and not much higher than when President Biden took office on January 20, 2021 (Closing price on January 20, 2021: DJIA = 30,930.52, NASDAQ = 13,197.18, S&P500 = 3,798.91) .
  2. When President Biden took office in January 2021, the inflation rate was 1.4%. Almost 16 months later, U.S. inflation is at 8.3% year-on-year, gasoline is at an all-time record high and home mortgage rates on a 30-year fixed-rate mortgage have risen from less than 2.8% to over 5.3% . . To make matters worse, the Federal Reserve balance sheet has grown from $7.4 trillion to $9 trillion today. Inflation is not under control and President Biden is certainly not without guilt.
  3. Americans are very concerned about US border security, particularly on our southwestern border. We are a country of immigration, but also a country of rules and laws. We must particularly protect our borders against the illegal immigration of people and the illegal import of pollutants.
  4. Americans are very concerned about the future of the US economy, particularly our growing dependence on other countries for no apparent logical reason. We have the potential to be the world’s cleanest and largest producer of natural gas, oil, clean coal and many other minerals, and a net exporter of most. Let’s unleash American competitive free enterprise, deregulate the US economy while reducing the global carbon footprint.
  5. In a recent Wall Street Journal article, “The 2017 Tax Reform Delivered As Promised,” by Tyler Goodspeed and Kevin Hassett, the authors provide conclusive evidence that Trump’s tax cuts, which are still in place today, resulted in a dramatic increase in federal tax revenue while the budget deficits we have faced over the past two years have been largely due to excessive government spending. In our opinion, we would be well served by consolidating the current tax policy.

Conclusion
The problems outlined above are the result of too much government interference in the economy. We must bring government spending under control, adopt logical pro-growth regulatory and tax policies, and create an economy where millions of consumers and businesses make most economic decisions, not local, state, or federal governments.

Please direct comments or questions to Dr. Timothy G. Nash at: [email protected] The NU Outlook is a monthly publication from the McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. This month’s publication was co-authored by McNair student Brad Getchel. To view Northwood University’s monthly Economic Outlook newsletters for the past few months, please visit: http://www.northwood.edu/media/publications/ .

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