Year in Review: What economic lessons did we learn in 2022?

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Last January, few predicted an economic train wreck. Some of us knew that a trainload of stimulus-induced consumer purchasing power was rolling with a full head of inflation-fueling steam. But the second train (Russia’s war on Ukraine, which destroyed lives, homes, and cities and dramatically reduced global energy and grain market supply) had not left the station.

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Finally unleashed and unmasked from COVID-19 restrictions, everyone across America had reasons for optimism. Real GDP growth for 2021 was pacing at a rip-roaring 5.7%, the January unemployment rate was just 4.0%, and there were more than 11 million job openings beckoning the 6.55 million unemployed to come to work. Consumers had stimulus money jingling in their pockets. Yes, it was hard to find a new car, housing was in short supply, and it wasn’t easy to locate builders to help with home improvements. The result? Our money did not get spent quickly. There was a lot of what would later be called “excess savings.”

A few economists of note who were focused on the astounding growth in the money supply (all those stimulus checks) and its historic relationship with inflation sounded the alarm. Johns Hopkins University’s Steve Hanke and Florida State University’s James Gwartney, for example, believed high inflation was inevitable. But the “it’s only transitory” contingent, progressives, and new monetary theory thinkers denied the linkage, and the more politically appealing position held sway.

Used car prices had already headed skyward along with the prices of practically everything else. In November 2021, the consumer price index had risen 6.8% year-over-year, the largest increase in three decades — by June, it would hit 9%. But the Federal Reserve said not to worry, pointing to lingering supply chain problems. Instead of decisively pulling the brake lever ahead of the curve, its January forecast called for the controlled overnight interest rate to range from 0.75% to 1.0%. The Fed reversed and started hitting the brakes in March.

How things changed.

The train loaded with purchasing power and the train filled with war supply reductions converged. The Fed-controlled rate now targets 4.25%. As late as March, respected analysts were optimistically calling for 2022’s real GDP growth to exceed 3.0% and for 2023 to peg 2.4% or better. Some of those same forecasters now expect less than 1.0% growth in 2023. There are lots of moving parts in the story, so let’s consider just two items:

First, the economic ramifications of the war, while never ignored, were underestimated. The disruption to energy and grain markets sent chaotic tidal waves across the world economy, causing huge populations of people to face starvation and major U.S. trading partners to face recession. Meanwhile, U.S. stimulus and record-setting domestic spending programs continued apace.

Second, the relationship between money and the economy matters. Far too little attention was given to the inflating power that trillions of government-created dollars would have when inflation became embedded in a government-stimulated economy.

These were tough lessons, which lead me to hope that we’ll do better in the years ahead. The Chinese zodiac calendar marks 2023 as the year of the rabbit, a time to celebrate longevity, peace, prosperity, and hope for the future. Surely these happy prospects could not come at a better time.

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Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, a dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.

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