We listened carefully to President Joe Biden’s Tuesday night State of the Union speech for what he plans to do about our growing inflation disaster. We were not impressed. Apart from paying lip service to inflation’s impact on working families, Biden’s proposals will, if anything, make the problem far worse.
Biden’s senatorial career goes all the way back to 1973 — by coincidence, the very beginning of the 1970s stagflation, marked by soaring energy prices, roaring inflation, falling real wages, rising unemployment and a dramatic decline in productivity.
Sound familiar? Shouldn’t Biden’s experience back when he was a young man lead to some kind of wisdom about the causes and cures for inflation? It sure didn’t show Tuesday night.
To begin with, he blamed corporate “greed” for inflation, which is scapegoating of the worst sort. To fix this, he proposed price controls and government subsidies on “computer chips, prescription drugs, health care premiums, weatherization projects, renewable energy, electric vehicles and child care” to get companies to boost output.
Corporations don’t suddenly get “greedy.” And greed isn’t the cause of inflation, as Nobel-winning economist Milton Friedman noted in perhaps his most famous pronouncement: “Inflation is always and everywhere a monetary phenomenon.” Many others have said the same thing.
Despite being in Washington when the last great inflation occurred, Biden is about to make the same mistakes made by multiple presidents that let the inflation problem go from being a brushfire to an all-out conflagration.
All of those presidents followed the same playbook: Spend more money, run up big budget deficits for Keynesian “stimulus,” hold official interest rates below market levels, and control prices by edict from Washington.
None of it ever worked.
As the useful reference Investopedia described the ’70s failure to stop inflation, “It would take … a brutal policy of tight money – including the acceptance of a recession – before inflation would return to low single digits. But, in the meantime, the U.S. would endure jobless numbers that exceeded 10%. Millions of Americans were angry by the late 1970s and early 1980s. In fact, it was a disaster.”
It took a new president in a new decade, Ronald Reagan, and a resolute Fed chairman, Paul Volcker, to tackle inflation. Reagan did it by stimulating the economy through tax cuts and deregulation, while Volcker raised interest rates to quell monetary inflation.
Biden was there for all that, but he apparently wasn’t paying attention. Today there’s very little debate, at least among non-woke economists, that a rerun of the 1970s is what we’re headed for right now with Biden’s clueless policy prescriptions, which include:
- Imposing price controls, which create shortages and rationing.
- Continuing recent massive increases in spending, in addition to the $3.6 trillion already spent by the federal government since Biden took office.
- Turning the Fed into an arm of the government by nominating Sarah Bloom Raskin to a key supervisory post at the Fed. She believes it’s the Fed’s job to fight climate change by forcing banks to stop lending to the same energy companies that now heat our homes, fuel our cars and make our economy possible.
- Blaming “corporations” (and Wall Street) for their greed, which Biden falsely and maliciously claimed caused inflation.
- Punishing energy companies with taxes and nonsensical regulations that slash output and cause prices to soar, all to halt highly speculative future “global warming.”
Even Larry Summers, President Barack Obama’s top economic adviser and former Treasury secretary, was left scratching his head over Biden’s absurd proposals.
Blaming inflation on corporate greed or holding out the prospect that capacity can be expanded rapidly is at best diversionary.
The best micro-policies involve reducing tariffs, the Jones Act repeal (allowing foreign entry into shipping), reducing regulation of fossil fuels and focusing government procurement on buying fast and cheap.
There is much more risk of too little monetary tightening than too much, especially if the Administration and its Fed appointees do not focus on price stability as a necessary precondition for strong employment performance.
The most recent data for the personal consumption expenditures index (the Fed’s favorite inflation indicator) show it rising at an annual rate of 5.2%, its fastest pace in 39 years. But it’s even worse than that, as other data show.
That’s significant, since the Fed today remains basically at a zero percent rate of interest.
Fed chief Jerome Powell told Congress Wednesday that the central bank will likely raise rates by a quarter point this month as it begins unwinding the unprecedented monetary stimulus over the last 14 years, during which the Fed’s balance sheet expand by $8 trillion.
Add Congress’ nearly $4 trillion in additional spending during the COVID pandemic, and that’s nearly $12 trillion in super-stimulus. All of it was either borrowed by Congress or created from thin air by the Fed, pushing our national debt above $30 trillion.
As for the Fed, “With inflation well above 2% and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month,” Powell told a House financial services committee hearing. “I would say we will proceed cautiously along the lines of that plan.”
The problem is, he’s so far behind the curve that a quarter-point hike is likely to do little if anything to quell inflation pressures. In that, Powell’s starting to resemble Arthur Burns and G. William Miller, the two failed Fed chiefs in the 1970s that let the inflation monster loose.
If Biden were smart, he would end his green war against cheap energy by restarting the Keystone XL pipeline, reopening federal lands to oil leases and exploration, and ending his regulatory and tax assault against energy producers. That would ease inflation pressures, and give the Fed time to move monetary policy back to something approximating normal.
Instead, we have too much money chasing too few goods. That’s the recipe for inflation. And, based on his State of the Union remarks, it’s the recipe Biden seems intent on cooking up for the rest of whatever remains of his term in office.
— Written by the I&I Editorial Board