Inflation, we’re told, is a devilishly complex phenomenon. What contributed to ballooning consumer costs that are eating into an ever-larger portion of your income? Honestly, what didn’t?
The global pandemic broke the global supply chain, reducing the amount of available goods. Consumer demand is surging, contributing to price hikes. Production costs are on the rise in response to a labor crunch. Loose monetary policy during the pandemic, which was designed to breathe life into the artificially stalled economy, had its intended effect. Inflation has many fathers. To hear the Biden administration tell it, however, one factor that in no way contributed to persistently high consumer costs is runaway public spending.
“Is the government stepping on the fiscal accelerator? That is, is government fiscal policy contributing to inflation, say, this year?” asked Jared Bernstein, a member of Joe Biden’s Council of Economic Advisers. It was a rhetorical question. “The answer, based on over one trillion dollars of deficit reduction, is no.”
Bernstein’s brazenness here is matched only by Joe Biden’s. The president, too, claimed that he was “the only president ever to cut the deficit by more than one trillion dollars in a single year” in his first State of the Union address. Indeed, the federal deficit in 2022 is expected to decline significantly relative to 2021, but that’s due primarily to the fact that much of the more than $4 trillion appropriated for Covid relief has already been disbursed.
Bernstein also failed to directly answer the question he posed to himself. Of course, the spending blitz to which the federal government committed itself from the onset of the pandemic contributed to inflation. At least that’s the impression you get from economists.
According to the president, “the critical job of making sure that the elevated prices don’t become entrenched rests with the Federal Reserve.” But a study presented last weekend at a gathering of the Kansas City Federal Reserve’s Jackson Hole Economic Symposium concluded that central banks cannot tame inflation if governments continue to flood their respective economies with capital.
“If the monetary tightening is not supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflationary pressure,” the study read. The report’s prognosis was rather dire. If governments continue their unrestrained spending spree, “a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise,” the dispatch added. “In this pathological situation, monetary tightening would actually spur higher inflation and would spark a pernicious fiscal stagflation.”
That paper argued that nearly half of the inflationary pressure on the American economy is due to reckless fiscal policy in Washington and to the general impression that the federal government would continue to hemorrhage cash for the foreseeable future. In heaping roughly half the blame for inflation onto the shoulders of the federal government, the Jackson Hole symposium went a little further than the San Francisco Federal Reserve, which also blamed Washington for contributing to inflation.
Why did inflation in the U.S. outpace the rest of the world between winter 2021 and spring 2022, a San Francisco Fed analysis asked? “Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021,” the report concluded.
Inflated prices as a response to too much money chasing too few goods isn’t a hard concept to get your hands around. The blizzard of indignation and credentialed vernacular Bernstein summoned to confuse viewers about the factors that contribute to inflation may not be sufficient to overcome the public’s general sense that heedless spending in Washington makes inflation worse. As early as autumn 2021, when the administration was still insisting price instability was “transitory,” a bipartisan group of pollsters found that seven-in-ten independent voters agreed with the statement: “People will continue to pay more money on everyday expenses unless the government becomes more fiscally responsible.”
Indeed, ensuring that demand remained high despite the dearth of goods to purchase was the intended effect of the Biden administration’s approach to fiscal policy. At least according to Treasury Sec. Janet Yellen. “Remember,” she told CNN host Jake Tapper in October 2021, “the spending that we did that partially has caused this high demand for goods.” The White House could argue that this was the policy pursued by both the last administration and the last Congress.
Courting the risk of inflation was subordinated to the exigency of the pandemic. The priority was averting the prospect of Depression-era levels of unemployment and a lost economic decade. That would be honest. But that is not their argument. They seem to have concluded that the best argument they can make for themselves is that inflation is an uncontrollable and entirely exogenous phenomenon, but relief will be on the way when the Democratic Party’s preferred deficit-reduction measures fully take effect over the next decade.
Best of luck with that.