Do They Even Know What Inflation Is?

By Noah Rothman

Friday, June 17, 2022

 

To judge from the Biden administration’s slapdash approach to the problem of rising energy prices—which contributes to rising costs across the board—the White House is panicking. One day, the president blames Americans’ reduced purchasing power on Vladimir Putin; the next, he attacks American petroleum refiners for failing to relieve the burden on consumers (in part, because so many refineries transitioned in recent years to alternative fuel production). When his administration isn’t begging fossil-fuel producers to pull more from their wells, its members insist we don’t need more domestic drilling.

 

Their efforts to mitigate the pain Americans are experiencing are no less confused. The Washington Post reported on Friday that, in their scramble to come up with some relief for American consumers, the Biden administration entertained the idea of sending “rebate cards to millions of American drivers.” If they had moved forward with this proposal, it would have disbursed yet another taxpayer-funded benefit, which would only subsidize general demand (money is fungible, even if you tell people they can only spend it on gas) that supplies currently cannot meet. Such a scheme would only contribute, however marginally, to the inflationary pressure on the economy that so vexes the White House. We were spared the government’s “help” in this instance only because “shortages in the U.S. chip industry would make it hard to produce enough rebate cards,” the Post revealed. So, an acute resource deficiency delivered us from the ravages of abject incompetence. Small favors.

 

This episode raises an increasingly relevant question: Does the president fully grasp the economic effects of an overheated marketplace typified by too much money chasing after too few goods? To take his recent comments to the Associated Press at face value, the answer is no.

 

In that interview, Joe Biden dismissed the idea that a bonanza of government spending under his watch—in particular, the American Rescue Plan Act’s individual stimulus and enhanced jobless benefits—had a pronounced inflationary effect. “You could argue whether it had a marginal, a minor impact on inflation,” Biden conceded. “I don’t think it did. And most economists do not think it did. But the idea that it caused inflation is bizarre.”

 

As the AP notes, one of the blinkered economic neophytes who disagree is Biden’s own Treasury Secretary, Janet Yellen. According to a forthcoming biography of the secretary, Yellen privately admitted: “that too much government money was flowing into the economy too quickly which is why she had sought without success to scale back the $1.9 trillion relief plan by a third early in 2021 before Congress passed the enormous program.”

 

Yellen reportedly expressed these doubts in agreement with former Treasury Sec. Lawrence Summers, who had warned ahead of the ARP’s passage that it risked overheating the economy. Though he festooned his February 2021 argument with deference to progressive orthodoxies (the risk of too little stimulus is “greater” than too much, “an overheated economy in which employers are desperate to find workers and push up wages” would be a “positive thing,” and so forth), Summers also warned of “the possibility of inflation.” Likewise, Massachusetts Institute of Technology economist Olivier Blanchard also cautioned that “this package is too much.” The Covid rescue plan combined with trillions of dollars in infrastructure spending would accelerate demand at an unsustainable pace. “This would not be overheating,” he advised, “it would be starting a fire.”

 

And, lo, what these economists predicted came to pass—at least, according to the San Francisco Federal Reserve. “U.S. income transfers may have contributed to an increase in inflation of about 3 percentage points by the fourth quarter of 2021,” the board observed of both the ARP and a smaller stimulus package passed at the outset of the pandemic.

 

“If it’s my fault,” Biden retorted, “why is it the case in every other major industrial country in the world that inflation is higher?” That would be a savvy rejoinder if it was supportable. But it’s not.

 

In some parts of the developed world, annual inflation rates do outpace America’s. But the U.S. outranks many more nations in this dubious regard. The U.S. inflation rate over the past two years outpaced the entire Anglosphere, to say nothing of developed economies like Germany, France, Japan, Mexico, Poland, Norway, Austria, and so on. When it comes to inflation, Pew Research Center’s data indicates that the U.S. ranks 13th among the 44 nations it examined. According to former Congressional Budget Office director Douglas Holtz-Eakin, U.S. inflation began to outpace most OECD nations after the ARP’s passage. “About half of the U.S. increase of four percentage points, PolitiFact reported, ‘you can easily attribute to the stimulus,’ Holtz Eakin said.”

 

It’s a mistake to blame any single piece of legislation for a fiendishly complex and multifarious problem like inflation. Anyone who would do so is trying to deceive someone—you or themselves. But it’s just as deceptive to insist that legislative efforts to stimulate an economy that had only been placed on ice during the pandemic did not contribute to rising consumer costs. They did, and that’s the unavoidable truth of the matter. If the administration’s temptation to inject even more capital into the already overheated economy is any indication, it’s a truth they don’t want to hear.