America’s inflation hawks always tend to croak. Since they spent the years after 2008 forecasting unprecedented hyperinflation, it is not surprising that few people sat up when they issued similar warnings last year. Now the hawk is right but for the wrong reasons. The recent rise in US inflation has nothing to do with the Federal Reserve’s easy money, as they have claimed. Democrats should however resist letting their ingrained skepticism cloud their sense of self-preservation. Prolonged inflation could destroy their chances of holding onto power.
Historically, inflation has done far more damage to left-wing governments than to right-wing governments, even if the responsibility had to be shared equally. Republican Richard Nixon did as much as his Democratic predecessor, Lyndon Baines Johnson, caused inflation in 1972 when he bullied the Fed chair, Arthur Burns, to cut interest rates during construction. his election. It was Jimmy Carter, a Democrat who sent inflation killer Paul Volcker to the Fed, contributing to Carter’s 1980 defeat. Beneficiary, Republican Ronald Reagan, tried unsuccessfully to ask Volcker to cut rates in the run-up to his 1984 re-election.
President Joe Biden’s re-appointment of Jay Powell last week should reassure markets that he values the independence of the Fed. Powell withstand pressure from Republican Donald Trump to keep rates low before the pandemic.
However, the wisdom of the people – typically Angela Merkel’s admiration of “Swabian housewives”, that balanced household budgets should be the model for national budgets – often punishes them. leftist penalty. In today’s case, with inflation hitting 6.2% last month, America’s highest in a generation, Biden’s Democrats bear a lot of responsibility. They made two mistakes that came back to haunt them. The first was the passage of $1.9 billion stimulus in March that hardly any economists contested.
Since the U.S. output gap — between the economy’s actual and potential output — is about $400 billion, this measure is overkill. It means too much money chasing too few goods, which is the most common cause of inflation. The bill is also politically short-sighted because it forces Democrats to downsize their much smaller but more prestigious investment law to “build back better.” History can see that stimulus as a mistake by the Democrats.
Biden’s second mistake was to bet that Covid-19 will fade away with vaccine deployment. If that’s the case, US consumers will be rushing out to spend on all of their in-person services that have been ruined during the pandemic. But the coronavirus is not going away — partly because of the emergence of the more virulent Delta strain, but mainly because a large minority of Americans refuse to be vaccinated or to respect social distancing. Covid’s persistence has meant that consumers have spent their expanding accounts on goods rather than services, which has squeezed dollars into a narrower subset of normal consumption. Pandemic-related attacks on global supply chains have not helped. But the main culprit is an increase in demand.
As usual, Democrats victim to dream. Biden cannot be blamed for the warped defense of “freedom” that has sparked a lot of anti-vaxxer protests since he took office. Protesters wearing yellow star vests to liken themselves to Jewish victims of Nazism are an example of an oddity that no US president can explain. But Biden will likely have a much harder time stocking up on vaccines — and still should. The White House could also do a better job of explaining why high inflation is something the left should fear so much more.
The top victims of inflation are fixed-wage people trying to save for retirement, as well as retirees. After years of income stagnation, America’s middle class should have benefited from a tight labor market. But despite the highest wage growth in decades, inflation is even higher, meaning that old-fashioned Americans aren’t feeling well with the recovering economy. Higher food and energy prices hit those who live on paychecks the hardest. Inflation benefits debtors, including America’s billionaire class, whose consumption is largely financed by borrowing against unrealized capital gains. Contrary to leftist folklore, higher inflation increases inequality, as the IMF showed. Price stability is therefore progressive.
As Biden knows, US presidents have little power to influence inflation once it has dried up. The temptation is to play up gimmicks to make it look like he’s acting. Biden’s move last week to release 50 million barrels of oil from a strategic reserve was a success of optics versus substance. The new supply will account for just over half a day of global consumption. Oil prices actually rose on this news. Keeping Powell in place is a step in the right direction, even though the Fed chair has stretched from the “transient” (inflation-related) to the breakout level.
Which leaves Covid. This is what Biden should have done. The obvious steps include creating a federal QR identity for the vaccinated person and preventing the unvaccinated from flying. The faster the coronavirus recedes, the quicker the US service industry will return to normal. The alternative could be a higher Fed treasury rate than the other valuation. Faced with trade-offs, Biden should embrace the vaccine culture wars with fervor.