The Biden Stagflation Is Coming

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The White House continues to insist that inflation will soon fade away and the country will return to its pre-pandemic prosperity. But the Biden administration’s regulatory agenda virtually ensures that the post-pandemic economy will be nothing like it was before. The mounting regulatory burden of Mr. Biden’s executive orders, his regulators’ open hostility toward America’s economic system, and the return to Progressive-era antitrust enforcement will stifle growth. All the ingredients will be present to turn the current inflation into stagflation.

America’s experience with regulatory excess is both recent and painful. When the subprime recession ended in mid-2009, economists predicted a strong recovery. In early 2010 the Office of Management and Budget projected 3.7% average real gross domestic product growth through 2016, the Congressional Budget Office estimated 3.3% growth for the same period and the Federal Reserve expected 3.5% to 4% through 2014. Instead, GDP growth slumped to an 80-year low of 2.1% during the 2010-16 recovery.

Democrats claimed the nation suffered from secular stagnation. But when subsequent deregulation and tax cuts revived the economy and the Biden administration needed justification for more stimulus spending, Democrats suddenly decided that Mr. Obama had stopped stimulating the economy too soon. While federal spending in 2009 hit the then-postwar high of 24.4% of gross domestic product, the 23.3% in 2010 and 23.4% in 2011 were the second and third highest postwar levels. By 2012, some 3½ years after the recession ended, federal spending was still 22% of GDP, then the fourth-highest postwar level.

Soaring spending and massive monetary accommodation couldn’t offset Mr. Obama’s stifling regulatory burden. While ObamaCare’s taxes harmed the economy, the wet blanket of his regulatory burden smothered the recovery, long before the 2013 tax increases.

In imposing ObamaCare, government increasingly dominated the healthcare industry, the green energy agenda hit auto producers and power plants and stifled the domestic energy industry with regulatory actions such as blocking the Keystone pipeline. Large banks were regulated as if they were public utilities, forcing them to replace tellers and loan officers with lawyers and compliance officers. The new Consumer Financial Protection Bureau (CFPB) investigated and harassed mortgage companies, as well as auto and personal lenders, and the Federal Communications Commission sought to regulate the internet as a 1930s monopoly. With some 279,000 federal regulators churning out more than 650,000 pages in his Federal Registers, Mr. Obama bound the economy in red tape and imposed 50% more costly “major rules” than had ever been issued.

Despite strong private investment levels during the Obama era, labor productivity—the mother’s milk of wage gains—averaged less than half the growth of the previous 20 years. The problem was business “investment” was made to meet regulatory requirements, rather than to increase efficiency and expand the productivity of the economy.

During the first days of the Biden administration, the cold dead hand of government regulation reached further than it had during the Obama years. Initial executive orders eviscerated cost-benefit analysis as the basis for regulatory policy by defining benefits to include “social welfare, racial justice, environmental stewardship, human dignity, equity and the interests of future generations.” Executive orders opposed business mergers and acquisitions independent of consumer benefit and targeted the oil and gas industry for extinction.

In seeking to reregulate railroads, Mr. Biden is trying to overturn the deregulatory legacy of President Carter and

Sen. Ted Kennedy,

whose achievements made the American transportation system the most efficient in the world and cut the cost of moving people and shipping goods in half. In antitrust enforcement Mr. Biden seeks to reverse almost a half century of bipartisan reform that junked Progressive-era regulations and profoundly expanded productivity, especially in transportation and high-tech communications.

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Nowhere is the Biden administration’s radical regulatory agenda more evident than in his appointees. President Clinton appointed

Larry Summers,

Arthur Levitt

and

Alan Greenspan

to regulate in the consumers’ interest and to grow the economy, not to transform it radically. Mr. Clinton’s regulators and regulatory policy let America prosper.

While Mr. Obama’s regulators stifled business and job creation, Mr. Biden’s are openly hostile to the industries they regulate and to the American economic system. They seek not to protect investors and consumers but to make business serve government goals.

Lina Khan,

Mr. Biden’s Federal Trade Commission chair, rejects the long-held consumer-benefit standard for antitrust action. She has called for breaking up leading tech firms simply because “big is bad,” despite no evidence of consumer harm. When consumer benefit is no longer the test of antitrust policy, consumer restitution is no longer the remedy. Threatening breakups, divestment and treble damages rather than enforcing the nation’s antitrust laws, the FTC can shake down business and exercise control over America’s most successful firms. U.S. tech policy now mimics the Chinese antitrust model where only government should be large and influential.

Mr. Biden’s CFPB chair,

Rohit Chopra,

hopes to hunt down big tech, forgive student loans and promote equity and diversity. Mr. Biden’s Securities and Exchange Commission chair,

Gary Gensler,

wants to compel private wealth to serve public goals such as fighting climate change and advancing social justice rather than protecting and promoting investors’ interests. And while President Biden’s nominee for comptroller of the currency, Saule Omarova, withdrew because of her Soviet-era ideology, he is now considering

Richard Cordray

as vice chairman of the Federal Reserve for banking supervision. Mr. Cordray’s only experience in banking was harassing, politicizing and intimidating those he regulated as Mr. Obama’s CFPB chairman.

Through Mr. Biden’s executive orders and regulatory policy the American economy is being transformed from the great colossus of world capitalism into a subservient Vichy capitalism, whose master is government and not the consumer. We aren’t in Kansas anymore.

If the regulatory stagnation of the Obama era is repeated by a doubling or tripling down on Obama-era regulatory policy, slowing growth seems destined to follow the current post-pandemic economic surge. If new stimulus spending and monetary accommodation is employed to stimulate sagging growth, that stagnation could easily turn into stagflation.

Mr. Gramm is a former chairman of the Senate Banking Committee and a visiting scholar at American Enterprise Institute. Mr. Solon is a partner of US Policy Metrics.

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