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Supply-Side Reforms Are Still Available

“But General, that way around the right is still open.” – Tom Berenger, as General Longstreet, to General Lee in Gettysburg

“Stagflation” is not a technical economic term, which in this case is actually helpful because it avoids the is-this-a-technical-recession argument that was kicked into overdrive by the report that GDP fell for the second straight quarter [1].

Real gross domestic product (GDP) decreased at an annual rate of 0.9 percent in the second quarter of 2022 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 1.6 percent.

The GDP estimate released today is based on source data that are incomplete or subject to further revision by the source agency (refer to “Source Data for the Advance Estimate” on page 3). The “second” estimate for the second quarter, based on more complete data, will be released on August 25, 2022.

The decrease in real GDP reflected decreases in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by increases in exports and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased (table 2).

We should wait for the second estimate of GDP at the earliest before answering if this is an actual recession. However, even if the economy is merely stalled or stuck in “slowth,” we can certainly call it “stagflation.” The shift in consumption from domestic products to imports in Q1 was a reflection of inflation’s impact, while decreases in inventory could mean firms are less than confident about the future.

Those of us old enough to remember the 1970s know that we’ve been here before. Now that inflation has become stagflation, this should give more urgency to boosting aggregate supply. The policies I cited two weeks ago [2] are still available.

As I said back then, Biden could have implemented them on Inauguration Day; he could have implemented them last month. He could have implemented them two weeks ago …

… and he can still implement them today.