Worst of times: High inflation, anti-business mentality having us heading toward recession

By Timothy G. Nash

McNair Center Director

This memorable opening line from Charles Dickens’s classic work A Tale of Two Cities seemed to be an appropriate place to start this op-ed regarding where our economy has recently been – and could be headed. That’s because the large amount of research I compiled for this article revealed dramatically different signals as to its direction and conclusion. Certainly, we had a strong economy followed by one of the worst quarters in American economic history from 2019 to the trough of the recent pandemic downturn in 2020. The Dickens quote, in my mind, can also be used to describe the Michigan and U.S. economy in a forward-thinking way: We’ve been experiencing very good times but unfortunately, many indicators are signaling that difficult times are ahead of us. 

Last week, relatively positive data was released on the Michigan and U.S. economies. The Michigan economy in 2021 produced an annualized state GDP growth rate of 6.2%, outpacing the U.S. economy’s overall growth rate of 5.7%.  Michigan was the 13th best-performing economy in the country and second in the Great Lakes Region, trailing only Indiana, whose economy grew at 6.9% last year.  However, Michigan’s GDP for the 4th quarter of 2021 showed a decline to 5.8%, ranking it 28th nationally.  Michigan retail sales increased in February, a positive sign for the Michigan economy after disappointing figures in December and January. 

The employment picture in Michigan also seems to be improving with the state’s labor force participation rate reaching a 16-month high of 59.5% with 56.7% of the state population employed in February.  The Michigan labor force is just now over 4.8 million people, the highest level in the state since September 2020, with almost 4.6 million people employed and only 228,000 looking for work.  Even though one person looking for a job is one too many, 228,000 is a dramatic improvement from the almost 1.04 million Michiganders looking for work in April of 2020.  A little bit more good news is that our unemployment rate has gone from a multi-year peak of 22.7% in April 2020, to 4.7% in February of this year.  The trend for unemployment is certainly moving in the right direction for Michigan, yet it is more than one percentage point above the national unemployment rate of 3.6%.  The U.S. economy fared equally well in 2021 in terms of job creation and economic growth.  In fact, according to the U.S. Bureau of Labor Statistics (BLS) there are roughly 11 million jobs, many of them high paying, that need to be filled.  Then why the parallel to A Tale of Two Cities?  What could be the worst of times today and/or on the horizon? The answer is simple and unequivocally answered by the words inflation, regulation, and taxation. 

Inflation

The prediction of transitory inflation that would last mere months by the Biden Administration and the U.S. Federal Reserve Bank in March of 2021 has proven to be a pipe dream.  Year-Over-Year, the February 2022 Consumer Price Index (CPI +10%) and Producer Price Index (PPI +7.9%) – key gauges of U.S. inflation – are at 40-year highs.  With average 30-year fixed home mortgage interest rates increasing from 3% to 4.5% in the first quarter of 2022 alone, we believe bank mortgage interest rates could easily reach 5.5 – 6% by the end of the year making it difficult for many in Michigan and across the United States to purchase a new home.  As one of my mentors Milton Friedman said, “inflation is always a monetary phenomenon.”  Until the Federal Reserve stops funding massive government programs and substantially reduces the money supply (its balance sheet is now at $9 trillion) inflation will not slow. It will only get worse in the months and year ahead. 

Regulation

Early in 2021, President Biden signed more than 140 executive orders to begin his presidency, many of which undid President Trump’s moves to reduce the regulatory burden on the U.S. economy (something we applauded at the McNair Center).  The Russian invasion of Ukraine and higher energy prices have further exacerbated the burden of increased regulation with mining for strategic minerals and coal, and especially petroleum and natural gas production.   This regulation has made our economy more dependent on unfriendly foreign powers while increasing the cost of generating electricity, heating homes, and producing gasoline.   

Taxation

President Biden is mistaken concerning certain groups not paying one’s fair share of income taxes.  If corporations are not paying income taxes, they largely must be investing in the economy and creating jobs, in order to generate the tax credits to do so. 2019 IRS data shows the top 1% of earners paid almost 40% of all personal income taxes.  President Biden’s proposals to further tax wealthy individuals and corporations will not create prosperity in the United States…it will reverse it. 

Conclusion

We believe high inflation and the anti-business mentality coming out of Washington, D.C. are the root causes of waning confidence in the Michigan and U.S. economies.  The latest Atlanta Federal Reserve Bank GDPNow estimate model calls for U.S. GDP to come in at a disappointing 1.3% growth rate for Q1 2022 (data released at the end of April).  Unfortunately, this is an optimistic figure when compared to a recent Q1 2022 GDP forecast by Goldman Sachs which downgraded their estimate to .5% growth.  

Disappointing GDP estimates by the Atlanta Federal Reserve Bank and Goldman Sachs coupled with numerous months of poor performance from the University of Michigan Consumer Sentiment Survey, slowing trucking and transportation industry data and the recent inversion of the yield curve between Two-Year and Ten-Year U.S. Treasury Bond Yields leads us to believe that there is a greater than 60% probability the U.S. economy will be in recession by the summer of 2023 or sooner.

Unfortunately, worse times seem to be on the horizon.

Economist discusses modern-day parallels with American Revolutionary War

I was born March 6, 1958, in the city of Detroit, to a Polish-American mother and Irish American father. I was welcomed into a close-knit middle class Catholic household of nine children, of which I was the middle child. We grew up with pride in America, our theology and ancestral roots, and with great respect for people of all races and creeds. My parents constantly stressed the United States’ greatest strengths were her system of limited government and the melting pot of people that was America. If I were to summarize how my parents raised us, it would be “parenting by Leo Burnett.” Burnett was the well-known advertising executive who once famously said, “Reach for the stars, you may not get one, but at least you will not end up with a handful of mud.” Because of my parents, my siblings and I truly believed with hard work and a strong moral compass we could accomplish just about anything.

Even though I have not lived in Detroit since 1976, it was a wonderful place to grow up – a place that has, and always will have, a warm spot in my heart. I often return to the city and when I do, I make excuses to drive by the historical monument of a horse-mounted General Thaddeus Kosciuszko, a Polish war hero who bravely led colonial troops for General George Washington’s Continental Army during the American Revolution. Kosciuszko’s leadership was of great help in defeating the British, winning independence and establishing these United States of America. 

Three of my four grandparents passed away before I was born, yet I was extremely blessed to know my grandfather on my mother’s side, Joseph Glosek. My mother’s father was born in 1893 in the town of Ostroleka, Poland, roughly an hour north and east of the Polish capital, Warsaw. His parents sent him to the United States in 1906 at the age of 13, with not much more than the clothes on his back, to escape conscription into the Russian Army. He passed the Statue of Liberty and entered the United States through Ellis Island. He followed the advice of New York Tribune Editor Horace Greeley (who is credited with coining the phrase “Go West young man” in 1865) and settled in the Motor City.

My grandfather loved America and worked his way up to the position of foreman in a Chrysler plant in Detroit before his retirement. He had always hoped to bring other family members to the United States but was never able to do so. By the time his finances afforded him the opportunity, the Communist Revolution had taken place in Russia, World Wars I and II had been fought, the Yalta Agreement had been reached and the Iron Curtain had descended across central and eastern Europe. Unfortunately, Joseph Glosek died in 1976, 13 years too soon to witness the collapse of the Berlin Wall and the fall of Communism in much of central and eastern Europe. However, I was able to somewhat fulfill a dream of his to return to his country of birth, when I traveled with some economist  friends to Poland in the fall of 1989 and met my grandfather’s niece (my mother’s cousin) and her husband in a restaurant in Warsaw. We enjoyed a beautiful dinner with my friends, shared hugs and tears and knew that the freedom my grandfather had enjoyed most of his life was now beginning to reemerge in Poland. As we returned to Frankfurt, West Germany to come home to the United States, our train traveled through then-Communist East Germany. It was just after American Thanksgiving on the train from Warsaw to Frankfurt at a stop in East Germany that my friends and I were notified that the figurative (and soon to be literal) collapse of the Berlin Wall had begun.

In my almost 33 years since meeting my Polish relatives in Warsaw and reflecting on my life as a person privileged to have been born in America, I have traveled by the monument to General Kosciuszko in downtown Detroit numerous times. I often wonder what may have happened to the American Revolution had a great general like Thaddeus Kosciuszko not been sympathetic to the American cause and voluntarily left Poland to fight for the Continental Army. What if he had not sailed for America in the summer of 1776 or French supporters had not provided money and armaments to General Washington and the Army established by the second Continental Congress? What if Kosciuszko had not applied to and been accepted into the Continental Army in August of 1776? Kosciuszko was not only a brilliant military general, but he was an engineer and early on, at the request of general George Washington helped build the fortifications at Fort Billingsport, Paulsboro, New Jersey. This fortification provided protection of the banks on the Delaware River and prevented numerous British advances up the river to the colonial stronghold of Philadelphia. Kosciuszko also fortified the U.S. Military Academy at West Point. Kosciuszko, like many other foreign generals, played a vital role in the American Revolution and the establishment of the United States of America.

The voice of liberty was answered by heroes foreign and domestic in this country in 1776, at the Berlin Wall in 1989 and is again crying out today in Ukraine. May all who can, answer today’s call and come to the aid of those seeking freedom in Ukraine and Russia. May God’s divine wisdom and intervention guide the leaders of the United States and NATO to help bring an end to Russian  tyranny in Ukraine and illuminate the light of liberty once again.

Dr. Timothy G. Nash is director of the McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University.

A windfall profits tax for profiteering?

In a free and competitive market, price always allocates scarce resources and directs production. When allowed to function freely, the U.S. oil industry is a shining example of this dynamic.

Oil is a driving force in the global economy that most of us take for granted.  Petroleum fuels our cars, heats our homes, and is found in thousands of daily-use items from hearing aids to computers. About 80% of all oil consumed in America is produced by small U.S. entrepreneurial ventures.  Without oil, our standard of living, life expectancy and potential for a brighter future would be greatly reduced. 

Drilling for oil to produce gasoline is one of America’s best risk-taking success stories. Drilling for oil places large amounts of capital at risk acquiring permits, finding customers, building pipelines, etc.  Oil entrepreneurs will take risks if they are confident in the potential outcomes. However, even at today's higher prices, many in the oil industry are not confident in expanding operations due to the Biden Administration’s restrictive energy policies.

GOVERNMENT RESTRICTS MARKET AND WANTS TO SEIZE SCARCE RESOURCES

Recently, U.S. Senators  Warren (D-MA) and Sanders (D-VT) proposed a windfall profits tax on U.S. petroleum as West Texas Intermediate Crude recently reached  $130 a barrel – about $17 shy of its 2008 record  – and gasoline realized an all-time high. The average national price for a gallon of gasoline on March 13 hit a record $4.32 (up from $4.01 the week before, $3.48 a month ago, and $2.85 a year ago) helping consumer inflation reach a year-over-year 40-year high of 7.9% in February.

Misguidedly, high prices for petroleum and record high gasoline prices have many thinking a windfall profits tax is a good idea, including former Michigan governor and U.S. Secretary of Energy Jennifer Granholm and President Biden who insist U.S. oil companies stop “profiteering” from high oil prices. What does this mean?

ARE U.S. OIL COMPANIES TRULY EARNING WINDFALL PROFITS? IS A WINDFALL PROFITS TAX BAD POLICY?

Data sets below from Professor Aswath Damodaran’s work as Professor of Finance at The Stern School of Business at NYU show a windfall profits tax on oil is a bad idea, citing the actual performance of the Oil and Gas sector as it relates to Total Market performance from 2008-2021 (representing over 7,000 publicly traded companies across 90 industries).  The data sets represent publicly traded U.S. companies (sources: Bloomberg, Morningstar, Capital IQ and Compustat). Due to a timing lag of data availability and posting, financial data for each year comes from the October-September timeframe (12 months combined).  We used average net margin (net income as a percentage of revenues) as our point of comparison. The Total Market performance for the 14-year period revealed an annual average net margin of 7.18% among 7,035 companies.  The Oil/Gas Production and Exploration industry produced an annual average net margin of –10.6% across 266 companies.  The Oil/Gas Distribution industry showed an annual average net margin of 5.05% (38 companies).  The Oil/Gas Integrated industry produced an annual average net margin of 6.09% (12 companies).  The data shows the Oil/Gas industry underperformed the Total Market.  From 2008-2021 the Total Market never recorded an average net margin loss, however, the Oil/Gas sector recorded large average net margin losses multiple times.

Using data from company annual reports and 10k filings, if you compare the top eight U.S. oil producing companies to just the top eight technology companies, the variance is even greater. Average net margins in 2021? … Top eight oil companies – 7.37%; top eight technology companies – 27.98%, or nearly four times greater. This follows 2020, a tough year for oil due to Covid-19, the emerging remote workplace and the enactment of many government travel restrictions, where the top eight oil companies showed an average net loss of 11.75%, while the top eight technology companies showed an average net margin of 21.33%.

If there was a windfall profit, it certainly was not earned in the U.S. oil industry since 2008.

Also, we predict when 2021-22 income is realized and profit is calculated for the U.S. petroleum industry, it will show short-term price spikes based on changing supply and demand conditions. This does not equate to profiteering – period.

CONCLUSION

Finally, we analyzed gasoline prices adjusted for inflation from 2008 through 2021 (in 2021 inflation adjusted dollars). We found gasoline averaged $3.11 a gallon, with less than a $0.20 fluctuation over the period  based on Bureau of Labor Statistics (BLS) data. This indicates a stable and dependable market for consumers regardless of short-term fluctuations due to world crises or regulation.

Enacting a windfall profits tax at any time is wrong. We believe the market process, driven by the forces of supply and demand, works.

The irrefutable financial data on and the dynamic economic structure of the U.S. petroleum industry compels us to conclude a windfall profits tax on petroleum is indefensible.

About the Authors: 

Dr. Timothy G. Nash is director of the McNair Center at Northwood University.

James M. Hop is chair of the Entrepreneurship program at Northwood University.

Lisa McClain is a member of the U.S. Congress from the 10th District of Michigan.

From Law & Liberty: Early America’s Political Pulpit — Dr. Glenn Moots, December 2021

https://lawliberty.org/classic/early-americas-political-pulpit/

From Modern Reformation: Between Biblicism and Secularism: Covenanting as Robust and Existential Political Theology — Dr. Glenn Moots, November 2021

https://modernreformation.org/resource-library/web-exclusive-articles/between-biblicism-and-secularism-covenanting-as-robust-and-existential-political-theology/

From Law & Liberty: Was the Protestant Reformation a Radical Revolution? — Dr. Glenn Moots, October 2021

https://lawliberty.org/was-the-protestant-reformation-a-radical-revolution/

From Townhall: Why We Must Oppose the Mandate — Dr. Glenn Moots, September 2021

https://townhall.com/columnists/glennmoots/2021/09/22/an-alternative-voice-to-president-bidens-recent-vaccine-mandate-n2596247