What Does the Speed Limit Have to do with the Economy?

Speed Limits. Anyone who drives is familiar with them and knows they are at risk of a fine if they are caught greatly exceeding the limit. But there is another great reason not to greatly exceed it—safety. If your car goes too fast for too long there is a tremendous risk of losing control. At a minimum, it will take great pains to reduce that speed safely. Hitting the brakes at high speed is dangerous and fraught with peril, so it’s best not to reach 95 miles per hour in the first place.

Believe it or not the term “speed limit” is used in the discipline of economics. Economists have generally referred to the speed limit as the level of growth an economy can tolerate without creating inflation.  If the economy grows faster than it has capacity to, prices will rise quickly on nearly everything.

Adam Smith alluded to the concept, without using the actual words “speed limit” in his famous book The Wealth of Nations in 1776. Smith pointed out that the degree of wealth in a nation is “regulated by two different circumstances; first by the skill, dexterity, and judgment with which the labor is generally applied; and secondly, by the proportion between the number of those who are employed in useful labor, and that of those who are not so employed.”

Congress and the President are charged with managing fiscal policy, which the amount of taxation and government spending on goods and services. The Federal Reserve Board (The Fed) manages monetary policy, chiefly through setting interest rates, but also through supervising banks and regulating the level of reserves that such institutions must keep on deposit.

It is little news now to most people that there has been a failure of “all of the above.” Folks see the failure every day at the gas pump and in stores.  Yet it is important to understand the failure. It’s not just a matter of “hindsight is 20/20 vision.” Experts like former Obama Treasury Secretary Larry Summers were sounding the alarm right after Joe Biden’s inauguration.

In short, Democrats in Congress were hell bent on passing a third stimulus plan. Economists warned against it, as the economy was growing. More money was not needed.  Vaccines were available to those who wanted them.  In short, we were emerging strongly from the 2020 pandemic. No matter. The Left was in charge on Capitol Hill, and they were determined to make their mark, and probably thought they could use the giving away of goodies (childcare benefits, another $1,400 check to most, $300 bonuses to not work) to their benefit at the next election.

What about The Fed? Chair Jerome Powell and Treasury Secretary Janet Yellen were famous for mouthing the words “transitory” or “just temporary” whenever asked to explain rising prices. Both were caught flat-footed, but they should not have been. The Fed’s job is to “take the punchbowl away before the party gets out of control.” What does that mean? It means you prevent economic overheating in the first place.

The Fed’s control mechanism is raising interest rates gradually to dampen demand. By slowly making loans a bit more expensive, it prevents housing and other big ticket items from increasing too fast in price, as fewer customers can afford the loans to buy such products. Of course, The Fed has been raising interest rates rapidly. But it does little good now. It’s akin to closing the gate after the horse is already out of the barn or removing the alcohol from the party after everyone has had way too much. 

U.S. economic policy since the last Federal Reserve Board induced recession by Chair Paul Volcker in 1981-82 has been to stop inflation from ever starting in the first place, thus negating the need for harsh medicines. But the folks in control of government refused to study history or even basic economics.

Now it’s too late. The Atlanta Fed, using preliminary data, said this week that the U.S. economy is already in a recession. The official Gross Domestic Product (GDP) data is due out later in July. It is expected to show another contraction in quarter two—April 1 to June 30. Two consecutive quarters of declining GDP is the definition of a recession. 

People may be down, but they aren’t out. We can all vote. A nationwide election of the entire 435 House seats and one-third of the Senate is November 8^th. Folks should keep in mind that every single Democrat in the Senate and every Democrat in the House but one (Rep. Jared Golden of Maine) voted for inflation with their “yes” on the third stimulus, which Democrats oddly called The American Rescue Plan. 

What a name— Rescue Plan. Rescue from what? The bottom line is the economic speed limit was greatly exceeded. And excessive spending, just like excessive speeding, has caused the same result—financial carnage for American families.

Jeff Szymanski works in political communications at AMAC, a senior benefits organization with nearly 2.4 million members.  He previously taught high school economics for 15 years.