by Mitch Kokai
Senior Political Analyst, John Locke Foundation
If, as seems increasingly likely, the United States and world have a hard economic landing next year, of one thing you can be sure: Policymakers both at home and abroad will not assume responsibility. Rather, they’ll point to COVID, a once-in-a-century health crisis, and Russia’s invasion of Ukraine as the primary causes of our economic woes.
The truth of the matter, however, is different. Without a series of egregious policy missteps in a number of the world’s major economies, we could have avoided a hard world economic landing.
Let’s start at home. Last year major mistakes were made that paved the way for multi-decade-high inflation and an equity and housing market bubble. In March 2021, when the US economy had already received a staggering $3 trillion in budget support, the Biden administration rushed through Congress the $1.9 trillion American Rescue Plan. This meant that over a two-year period, public spending increased by some 20% of GDP. That’s by far the largest US peacetime budget stimulus on record.
Making matters worse, the Federal Reserve kept its pedal to the monetary-policy metal even when the economy was recovering strongly and when the equity and housing markets were on fire. It kept its policy interest-rate at its zero lower bound and flooded the market with $120 billion a month in liquidity via its bond-buying activities.
Major policy mistakes were also made in China, the world’s second-largest economy and until recently its main engine of economic growth.
Through years of reckless lending, China’s central bank managed to create a property and credit market bubble larger than that which preceded the 2007 US housing and credit market bust. More recently, through pursuit of a misguided zero-tolerance COVID policy, the Chinese government has managed to snuff out economic growth by locking down major cities like Shanghai and Beijing. No longer can the world economy count on China to help bail it out from any economic downturn.