Are We Headed for Inflation? Deflation? Stagflation? Try “Screwflation”, Kass Says

While the 1970s were marred by “stagflation”, money manager and columnist Doug Kass says the U.S. is now being hit by “screwflation” — that is, the combination of inflation and the “screwing of the struggling middle class”.

“While the U.S. economy, in real terms, has more than doubled in the past 30 years and corporate profits will soon attain a new peak, median real wages have made little recent progress, and surging food and energy prices (among other cost pressures) now eat up middle-class incomes,” Kass writes in an article for Barron’s. “Moreover, the lost decade of flat stock prices and an unprecedented four years of declining home prices have further weakened the confidence and purchasing power of the middle-class screwees.”

Kass says three factors have created “screwflation”: the integration and globalization of the world’s economies; broad advances in technology; and the increasing usage of temporary hiring. Those factors have created structural problems in the U.S. labor market, Kass says. In the first half of last decade, the booming real estate market was able to provide enough jobs to mask such problems, Kass says, but that boom has since become a bust.

Wage hikes, meanwhile, have lagged far behind rising commodity prices, Kass notes. Calling the economic and stock market rebounds “hollow”, he says the U.S. needs to address screwflation “with policies that increase income for the middle class and fight commodity-price inflation.”

His recommendations include: extending the payroll-tax cut; reducing income taxes for the middle class; providing federal funds for infrastructure spending; creating incentives for businesses to make new capital investments; allowing tax-free repatriation of U.S. corporate earnings made abroad, if they are earmarked for the creation of American jobs; the launch of an energy plan that taps domestic resources; and the use of federal-housing financing to slow foreclosures and distressed sales.