In spite of this past week’s warning by Federal Reserve Chairman Jerome Powell about the pain we will experience as central bankers worldwide work to bring down inflation, there are die-hard optimists still talking about soft landings and the return of the “just right” Goldilocks economy. I, too, am a congenital optimist, but am saddened to report that Goldilocks doesn’t live here anymore.
Those happy days when everything economic seemed “just right,” and inflation and GDP growth were neither too hot nor too cold, are over for a while. Unfortunately, just as the storyteller reminded us, the three bears came home and scared the hell out of Goldilocks. Right now, she is nowhere to be found.
What are those three bears that chased away our happier times? And when might they go back to the woods so that Goldilocks can find peace and happiness again?
The first bear is the pandemic. Yes, we are no longer told about COVID-19 disasters on a daily basis, but we still cannot find a wide enough selection of new cars on dealer lots, there is a short supply of entry-level workers, there are lots of people who left the labor force and have not returned and there is a long waiting list for people who seek elective surgery.
Even worse, since the last folks to return to work are typically the least experienced, worker productivity is in a serious state of decline. That makes it tough to get meaningful GDP growth.
In a few words, the Great American Bread Machine – our economy – is still bent out of shape. It may recover in 2023, other things being equal. But then, other things are rarely equal, are they? After all, there are two more bears to consider.
The second bear is the Russia-Ukraine war and related disruptions in energy markets. Within the generally excellent news coverage of the horrors of the invasion, not much attention has been given to the destruction of human and physical capital. Each lost life is precious beyond words. But in blunt economic terms, each life forgone takes away hundreds of thousands of dollars in lost production and related happiness. We have no reliable data on lost lives and the value of destroyed man-made structures in this war, but we can be sure that each day that hostilities continue, the world is made poorer.
And, yes, people worldwide can feel the pain of high electricity and gas bills. We can surely expect the energy crisis component of the war to continue. This second bear will be with us until long after the Ukraine invasion has ended.
The third bear, as you likely guessed, is inflation coupled with the Fed’s obligatory effort to bring it down. In a way, it seems strange to suggest that Goldilocks is gone, because the Fed has had its own trouble deciding when the economy is too hot or too cold.
In a realer sense, it’s strange that the controller of the nation’s money supply seldom if ever talks about money and its supply when describing the forces that beset us and what might be done about them. Instead, we hear constantly about interest rates, supply chain problems and energy supply.
And while that chatter fills the evening news, investors and other ordinary Americans are left to guess just what might happen at the next Fed meeting. Guessing means uncertainty, and uncertainty means falling investment as we figure out how to build a new, more modern, economy.
Despite all this – and indeed hopefully because the Fed makes the right moves – this time of economic trouble will pass, but not soon. Goldilocks no longer lives here, but someday she may return. Let’s focus on chasing those bears away.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson College of Business and Behavioral Sciences.