The US economy in 2022: all eyes on inflation

Where is the economy headed in 2022? 2021 started with Keynesian optimism: government spending paid for with easy money is seen as a magic elixir that can solve any economic crisis. If socialism fails because you end up running out of other people’s money, Keynesianism fails when the benefits of easy money have run out. While the monetary authorities told us that the inflation we were seeing was transient earlier in the year, they subsequently dropped that narrative. The questions are: Has monetary easing had its day as a useful policy tool? How long are we going to experience these much higher rates of price increase?

In these annual reviews of the U.S. economy, I focus on the underlying fundamentals that I consider essential for healthy growth, as well as the influence of the global economy and major U.S. trading partners.

Table 1:

In Table 1, I list the key indicators of twenty of the world’s major economies. I focused on those for which I had measures of economic freedom and a rule of law score as assessed by the World Justice Project (RLI). So I left out Switzerland, Taiwan and Saudi Arabia, which do not appear in the RLI. Including them in the statistical analysis would not have changed my conclusions.

These twenty economies produce 80 percent of world production. Sixty percent of the world’s population lives there. As you can see from the attached table, they are also diverse. Africa is the only continent that lacks representation among the top 20. The analysis of these economies, given their weight, provides enough information to analyze the international factors that could influence the performance of the US economy.

The trends are not good for 2022. Of the top 20, nine saw their rule of law score drop, only two improve and nine remained unchanged. We saw declines in the two largest economies, the United States and China, accounting for 50% of the combined GDP of these top 20 countries. Economic freedom scores fell in thirteen of those countries and improved in five, while two remained unchanged. The United States and China were among the countries with the lowest economic freedom scores.

The rule of law is essential for long-term economic growth. I integrate its measurements to produce a simple index of “economic freedom with justice”. I add the two scores together and use the average to predict the potential of a given economy.

Table 2:

When I rank countries on this combined rule of law and economic freedom score (Table 2), the United States still ranks in the top ten. Additionally, to understand how attractive an economy is to local and foreign investors, I added a score for the size of an economy and the expected growth rate. Both factors are relevant for investments. They complement the policy indicators which take into account the index of economic freedom, the rule of law index and the political environment of the country. With the United States being the largest economy in this group and the fifth largest in terms of expected growth rate, I consider the United States to be well positioned to continue to attract more foreign investment and entrepreneurial talent than most. other countries. While Latin America is expected to underperform the rest of the world, I predict that the flight of human capital from that region to the United States will accelerate.

Canada, China and Mexico, the United States’ three largest trading partners (each accounting for just over 14% of our current trade), will continue to experience economic improvements. Only China is growing at a faster rate than the United States. Their budget deficit is lower than that of the United States, so I don’t see this factor as their main problem. However, with different styles of populism in Canada and Mexico and authoritarianism in China, the leaders of these countries tend to side with the state more than with a free economy. Only China is likely to experience higher growth than the United States, but not as much as in 2021. Its weaker growth, in addition to lingering concerns about its trade and investment practices, will mitigate the positive effects of trade and investment. investments involving China.

I’ve been writing this column since 2013, and this is the first time I’ve expected inflation to be the number one topic discussed. While many blame supply chain issues, labor “shortages” and even the rising price climate, the focus should be on Federal Reserve policies. Inflation is a monetary phenomenon. When the money supply grows faster than the supply of goods and services, sooner or later prices will rise. Since inflation is a secret way to pay for public spending, it tends to be popular with governments. Public officials tend to blame price increases on “greedy” companies that charge more for their products and services. Senator Elizabeth Warren is a good example. Robert B. Reich, former secretary of labor in the Clinton administration, also recently blamed “corporate greed”. But today, perhaps more than ever, voters tend not to trust politicians, the media, or government-linked economists when faced with a rising cost of living. If prices continue to rise at the current rate, it is almost certain that we will see a massive Republicans victory in the 2022 midterm election. is not the fault of Democrats alone. But, at the polls, voters react more to perceived economic realities than to policy analysis.

While in most of the indicators that I present in Tables 1 and 2, the United States performs better than the average of the 20 largest economies, it ranks in the bottom half in terms of inflation. The Federal Reserve will be in a tough spot when it starts raising interest rates next year. We will likely see an economic slowdown and a correction in the stock market. I expect the Fed to try to avoid being seen as the party spoiler and once again tailor its monetary policy to the political needs of the ruling party.

The likelihood of a change in the US political-economic climate after mid-term, which will also likely make it more difficult for the administration to increase regulations and taxes, is a source of optimism for potential investors. . Republicans are more successful in stopping government spending growth when they are in opposition than when they are in the majority. It’s reasonable to expect that after November 2022, it will be more difficult for the Biden administration to implement a more radical interventionist agenda.

I left for the end the factors that go beyond economics but can have a significant impact on the economy of the United States and other major countries. The most relevant are:

  • The continuation of the Covid-19 crisis.
  • China’s foreign and domestic policies.
  • Russia’s ambitions in Ukraine.
  • Potential movements of actors in the Middle East inspired by radical ideologies.

Each would require an analysis of its own. On the topic that is making headlines today, the new variant of Covid-19, I expect the world to adapt to the pandemic with less drastic measures. The impact on the economy will be less than in the past two years. So, to have a good 2020 in your economic decisions, focus on how to navigate the changes that will come with less expansionary monetary policy. Don’t expect the Fed to slam on the breaks, but expect a cautious cut.

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