U.S. Should Focus on Economic Growth

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

Some of you might say that this is a strange – or downright wrong – policy position to take at a time when the country is facing accelerating core inflation pressures.

But that’s what I think. Yes, I believe that the U.S. should manage inflation with specifically targeted structural measures, instead of solely relying on a broad and indiscriminately depressive power of a tightening monetary policy.

What are those structural measures?

First and foremost, the U.S. should urgently increase oil and gas supplies to quickly bring down energy prices, which account for nearly 10% of the consumer price index.

The next move would have to deal with serious labor supply shortages. About 40% of America’s active civilian population remains out of the labor market. Leaving 100 million Americans virtually unemployable is an economic, social and political disaster.

Fiscal policies should therefore be used to increase the stock and quality of human capital through lower employment costs and a wider access to education and vocational training. That will take time, but that urgent task must be dealt with.

The U.S. energy price inflation is a much easier problem, although its broad ramifications don’t seem to be fully understood.

At the moment, energy prices are rising at an annual rate of 27%. That, however, is just for starters. The second-round effects of increasing energy costs work through multiple product and service channels to destabilize the cost structures in the entire economy.

Keeping that in mind, it is clear that holding down energy and labor costs would protect growth by raising productivity and supporting demand, output and employment.

That has been a successful growth strategy of some consistent trade surplus countries, where businesses were able to expand global market shares by using efficiency gains and technological innovation to strengthen their competitive positions.

It therefore bears repeating that a structural approach to managing inflation is preferable to sweeping measures of tightening credit conditions that hit everything and everybody – and inevitably lead to growth recessions, with shrinking labor and product markets.

Fortunately, the situation we are now facing in the U.S. allows for a judicious combination of structural and monetary demand management measures.

Indeed, with the end points of the yield curve showing negative real interest rates of 7.18% and 5.33%, there is plenty of room to raise nominal interest rates in a gradual manner.

And that whole process could unfold with a high degree of liquidity and low credit costs – if declining energy prices were to stop and reverse the current inflationary flare-up.

The U.S. should lead the way by immediately releasing its huge oil and gas reserves. Time should not be wasted to coordinate that action on an international level.

The key OPEC Plus countries have already signaled their reluctance to increase energy supplies. That is unlikely to change in time to help the U.S. inflation management.

Politically, the White House should understand that it is in its own interest to avoid sharp and precipitated interest rate hikes by doing its part on boosting energy supplies.

In a world at war for the foreseeable future, protecting and enhancing the economic growth should be America’s key strategic decision.