“In debates over the Bush economic record, the dollar’s decline and its companion rise in prices are the great missing links. Democrats don’t mention it because they’d rather indict the Bush tax cuts as a way to justify a huge new tax increase. Wall Street and big business don’t talk about it because they’ve been complicit in urging devaluation. And the media mostly ignore it because so few of them even think about monetary policy.”—Wall Street Journal, “McCain, Bush and the Dollar,” September 4th, 2008.
In the late 1970’s, the great stagflation—high inflation plus economic recession—of the Carter administration devastated President Carter’s re-election campaign. The so-called “Misery Index”—inflation plus unemployment—was well over 20 percent in 1980, and it cost the Democrat Party its credibility on the economy for over a decade.
When Ronald Reagan was elected, he pursued low taxation and a strong dollar as his dual approach to strengthening the economy. It worked. The economy grew overall as inflation fell.
This year, according to the Wall Street Journal, the Misery Index has risen to to 11.3 percent for the first time since 1992. Inflation is again on the rise, and it is clear that Republican credibility on a strong dollar, low inflation, and the overall health of the economy is now on the line.
The loose dollar policies, including artificially low interest rates, of President Bush’s Federal Reserve ultimately run the risk of tarnishing the Republican brand for a generation, just as the stagflation of the 1970’s did to Mr. Carter’s party. As the Journal reports:
“Chairman Ben Bernanke insists the Fed has had no other choice to stave off recession, and that in any case ‘core inflation’ (which excludes food and energy) is contained. We’ve tangled with those arguments many times and won’t do so again today. But there’s no denying that the result of the Fed’s reckless easing has been a spike in consumer prices, especially in food and energy, and thus a decline in real middle-class purchasing power. American consumers — aka voters — are justifiably angry about this because they don’t buy Cheerios and gasoline with ‘core’ dollars.”
In other words, the American people may not make a distinction between “core inflation” and the commodity price spike when they are attempting to determine who is accountable for soaring prices on everything they need. Besides, not only was there a commodity price spike this year, but both CPI and PPI are up. Inflation is not contained to commodities.
There may be a ray of sunshine from Senator John McCain’s campaign, however. When delivering the Republican National Convention’s delayed keynote address, former Mayor Rudy Giuliani specifically addressed Mr. McCain’s position on inflation:
“[John McCain] will reduce government spending to strengthen our dollar.”
This simple policy prescription contains a very strong argument against deficit spending, growing the national debt, and living beyond our means. And it, of course, encapsulates the Reagan formula for economic growth.
Americans understand that if they go too far into debt, the interest payments will progressively eat up larger and larger chunks of their income. It not a far stretch to use that as an analogy to what takes place nationally year-in, year-out by the Congress. Overall, with both the government and the American people taking on more in debt than they pay back, the active money supply increases, which means more dollars chasing fewer resources, and thus inflation.
For far too long, Washington politicians have pretended that their fiscal irresponsibility was “good” for the economy. Hence, in 2008, the American people witnessed a useless $150 billion “stimulus” package. Already in deficit, where do people think Congress got that money? That’s right, they borrowed it.
Clearly, this trend cannot, and must not, continue. With the national debt rapidly approaching $10 trillion, energy costs eating up more and more of American wealth, and the global economy slowing down, the American people will be depending on their purchasing power to make ends meet. If it continues to decrease, the next generation of Americans will not only be worse off than their parents were; the country could be entering an economic dark age, with not light at the end of the lengthening tunnel.
These are critical trends, and woe unto politicians who ignore them. Fortunately, at least one of the major candidates sees that Big Government is indeed the cause of inflation. Obviously, John McCain does not want to earn a reputation on the economy akin to Jimmy Carter.
Which means he’d better find the “missing link” before the Misery Index overwhelms a McCain presidency.
