How the Southeast can weather stagflation

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Op-ed views and opinions expressed are solely those of the author.

Economic turmoil is upon us, and it compels mettle and thrift rather than chicanery.

The trick to escaping the new normal of low growth and elevated inflation will be in avoiding knee-jerk reactions and declining to take the bait from the federal government. Placating fears with gimmicks would dig the hole deeper and ratchet up the heavy hand of government.

Steve Hanke, a preeminent economist at Johns Hopkins University, recently warned of a “severe downturn” in 2023. Combine that prognostic with out-of-control inflation—not returning to the 2 percent target any time soon—and you have stagflation. Add Hurricanes Ian and Nicole to inflation running at 9 percent, above the national average, and the Southeast is feeling the pinch.

Already, national economic growth is hovering at nil for 2022, so the pressure is building for governments at all levels to do something, anything. Unfortunately, for example, a majority of Americans have fallen for the siren song of more stimulus checks—as though ad hoc money printing will solve economic malaise and rising prices. A so-called windfall tax on profitable firms would be class warfare and even more counterproductive.

Back on the growth path.

At the policy level, there is no shortcut to resilient growth. It accumulates amid regime stability and economic freedom; market liberalization is the “number-one essential ingredient,” as the late Nobel Laureate Gary Becker opined. Growth then compounds gradually and persistently over generations. Times of recession, therefore, call for getting back onto that growth path and resolving what caused the departure.

This is one area where Florida and Georgia have been ahead of the game. They were more inclined to resist shutting down their economies amid COVID-19 hysteria, and they led the nation in opening up for business.

Voters have rewarded both governors—Ron DeSantis (FL) and Brian Kemp (GA)—with reelection. With favorable legislatures, these Republican governors have relatively free rein to lead the nation for economic growth and business in-migration. There is low-hanging fruit for improved positions on the Rich States, Poor States economic competitiveness ranking, where Florida is eighth and Georgia is 15th. Such policies include tort reform, a switch to defined-contribution pensions, and leaner spending to ease debt servicing and tax burdens.

Good profit versus bad profit

What can and should be done rests on the objective: juicing the numbers or delivering prosperity? Consider that more government spending is included in GDP measurements, even though it is only tangentially subject to market prices. Make-work schemes, especially if monetized by the Federal Reserve, achieve the appearance of growth (bad profit). Meanwhile, they divert resources from productive initiatives (good profit) that command market demand.

In his 2015 book Good Profit Koch Industries co-owner and chairman Charles Koch explains the distinction. “Principled entrepreneurship” has the goal of delivering “superior value” to customers, in contrast to achieving returns from subsidies or protectionism.

Efforts towards economic recovery must focus on good profit: what adds long-term value and serves perennial human needs. This is the American way of dealing with problems—not waiting for politicians but rather resolving them via civil society and private business. The Southeast can take bottom-up action on the personal and entrepreneurial levels with dollars to support healthy growth and lessen the pain of inflation.

Recession-proof investment

There are already positive private-sector role models in this regard.

Publix, the largest firm headquartered in Florida, is one example with a “people-first culture,” as Brian Solomon of Forbes has noted. Publix’s distinct ownership model promotes employee engagement and incentive alignment for loyalty, resilience, and bottom-line results. Home Depot, also headquartered in Florida, has likewise taken a long-term approach to employee welfare, so workers recently voted against unionization.

Another is Navarro Discount Pharmacies—a CVS subsidiary. It offers bilingual pharmacies and medical care tailored to Hispanics. With origins in pre-Castro Cuba, it has reveled in the US marketplace, innovated, and achieved a dominant market position in South Florida.

Likewise, Koch Industries, with several subsidiaries in Florida and Georgia, has for decades walked the talk by embracing innovation and bringing affordability to the masses. Such organizations are precisely the ticket for gainful employment, economic growth, and purchasing power. In fact, Koch Industries—the second largest privately held company in the United States—was one of the few businesses to emerge stronger after the 2008 global financial crisis.

These companies not only earn good profit; they provide for fundamental human needs like food, medicine, and energy. Unlike beauty-contest or meme stocks, firms serving fundamental needs will not come and go with market sentiments.

Similarly, they do not need ESG (environmental, social, governance) ratings, which divert resources for progressive agendas. For savvy investors, ESG is a red flag to avoid. It is leftist intimidation of companies such as Doral-based World Fuel Services, which provides the energy we all need. ESG ratings do little but increase costs and pervert incentives, compounding inflation.

Despite stormy economic clouds ahead for the United States, Florida and Georgia are well positioned to weather the storm and be role models for noble entrepreneurship. Those in elected office can work to ensure certainty and a light touch with taxation and regulation. Individuals and firms can direct their funds and talents towards win-win profits that generate authentic growth and prosperity.

Fergus Hodgson is the director of Econ Americas, a financial consultancy devoted to alternative investments and jurisdictional arbitrage.

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