By James Pethokoukis

What’s next for the US economy? That’s the question I asked AEI economist Michael Strain recently. He outlined three possible scenarios.

• The good. The Powell Fed gets its “immaculate disinflation” or “soft landing” where the economy continues to grow but inflation cools off. Strain: “This is what you would expect to see if inflation were largely a supply-driven phenomenon. As supply chains unsnarl and workers come back to work, you would see downward pressure on prices.”
• The bad. Shrinkage. The economy enters a recession. Strain: “In a recession you would see economic activity slow, the unemployment rate rise, and if the recession were severe enough, it might be enough to bring inflation back down to [the Fed’s] target in 2023. But that would be bad because there would be a recession.”
• The ugly. No recession, but stagflation. The unemployment rate rises (but not so much that the economy tips into recession) and inflation slows (but not so much that it hits the Fed target.) Strain: “So you have a situation where the economy is stagnating, not reversing . . . but prices are considerably above the Fed’s target with a slowdown in economic activity.”

Given how far the Fed got behind the curve, Strain thinks stagflation is the best possible outcome right now, especially given the demand-driven aspect of the inflation surge. We’ll see. But whatever comes next for the economy, I thought it would be a good time also to briefly remind ourselves of the state of things before the COVID-19 pandemic. As it turns out, Strain’s book from early 2020, The American Dream Is Not Dead (But Populism Could Kill It), provides loads of insight into the pre-pandemic economy. Also lots of great charts. Here are three of the most important.

First, wages have not been stagnant for decades:

Second, income growth has not been stagnant for decades:

Third, most Americans in their 40s are doing better than their parents were doing during their 40s: 

Yes, I realize these charts contradict the “late-stage capitalism” story so commonly presented in the media, both mainstream and social. They also undermine many of the claims about the economy being put forward by populists of the left and right. Let’s hope the post-pandemic economy continues to violate such wrongheaded narratives.

The post The US Economy: Looking Forward, Looking Backward appeared first on American Enterprise Institute – AEI.