Thursday, February 17, 2022

We’re Paying for All of That ‘Free’ Money Now, Aren’t We?

By Jim Geraghty

Thursday, February 17, 2022

 

The latest Quinnipiac poll asked Americans to choose the most urgent issue facing the country today, and inflation topped the list at 27 percent, followed by immigration at 12 percent and Covid-19 at 10 percent. Unemployment — which is pretty darn low these days — was mentioned by just 2 percent. And this is not an outlier; a recent CNN poll found that 42 percent said inflation was one of the two important issue for the U.S. government to address this year; “ensuring that borders are secure” came in second at 29 percent.

 

If Biden and the team around him had a lick of political sense, they would be spending as much time as possible talking about all the things they’re doing to reduce inflation. They would recognize that this is one of the rare times when Americans feel just fine about the number of jobs available and don’t want to hear about job-creation plans, because other economic issues are making their lives much more stressful.

 

Alas, today, President Biden travels to Lorain, Ohio, to “deliver remarks on how the Bipartisan Infrastructure Law delivers for the American people by investing in clean-up and restoration efforts in the Great Lakes region and surrounding waterways.” Yes, he’s announcing that his latest big-spending plan will create more jobs when the country is experiencing a labor shortage and has 10.9 million unfilled positions.

 

Americans don’t want Biden to talk about the federal government going on a hiring spree. Americans want to be able to afford more when they go to the grocery store and when they go to fill up their tanks of gas, not have their rent hiked, and maybe not see their hope of buying a house slip out of reach.

 

Inflation is, arguably, the biggest problem facing the Biden administration right now. And yet, when asked about it, Biden offered word salad:

 

NBC NEWS’ LESTER HOLT: Inflation skyrocketing to 7.5 percent, a 40-year high. Prices still spiking on everything from used cars to gas to food. Inflation now costing the average American an extra 275 dollars a month compared to last year. I think it was back in July, you said inflation was going to be temporary. I think a lot of Americans are wondering what your definition of ‘temporary’ is.

 

BIDEN: Well, you’re being a wise guy with me a little bit. I understand that’s your job. But look — at the time what happened was the, uh . . . let’s look at the reason for the inflation. The reason for the inflation is the supply chains were cut off, meaning that the products, for example, automobiles, the lack of computer chips to be able to build those automobiles, so they could function, they need those computer chips. They were not available, so what happens? With the number of cars were reduced, the new cars reduced — it made up at one point one-third the cost of inflation, because the price of automobiles were up. So, what I did, when I went out and made sure we started to make those domestically. We got Intel to come in and provide 20 billion dollars to build a new facility. A number of organizations are doing the same kinds of things.

 

Those two new Intel semiconductor-chip plants in Ohio that Biden mentioned are “expected to be completed in 2025.” I’m as happy as the next guy to see huge numbers of new, high-tech jobs created in Ohio, but let’s not pretend that these factories are going to do anything to mitigate inflation in the here and now:

 

NBC NEWS’ LESTER HOLT: When can Americans expect some relief from this soaring inflation?

 

BIDEN: According to Nobel laureates, 14 of them, that contacted me and a number of corporate leaders, it’s ought to be able to start to taper off as we go through this year. In the meantime, I’m going to do everything in my power to deal with the big points that are impacting most people in their homes.

 

Nor is Biden the only national leader whose language becomes gobbledygook on the topic of inflation. Our Dominic Pino observes that House speaker Nancy Pelosi contending that a ten-year, $3 trillion spending plan is what is needed to reduce inflation, and stated that low unemployment causes high inflation. (That assessment does not align with the evidence of the U.S. economy of the past six decades or so.)

 

Even Steve Rattner, President Obama’s former “car czar” who managed the bailout of GM (which was making cars that would kill you if your key chain was too heavy, but that’s another story), writes in the New York Times today that Biden’s explanations about inflation are both “simplistic and misleading”:

 

For starters, the supply chains have not been “cut off,” just stretched. And supply issues are by no means the root cause of our inflation. Blaming inflation on supply lines is like complaining about your sweater keeping you too warm after you’ve added several logs to the fireplace.

 

The bulk of our supply problems are the product of an overstimulated economy, not the cause of it. Sure, there have been some Covid-related challenges, such as health-related worker shortages in factories and among transportation workers. But most of our supply problems have been homegrown: Americans have resumed spending freely, and along the way, they have been creating shortages akin to those in a shopping mall on Black Friday.

 

All that consumption has resulted from vast amounts of government rescue aid (including three rounds of stimulus checks) and substantial underspending by consumers during the lockdown phase of the Covid crisis.  There has also been an unforeseen shift in what consumers are buying: With travel still sluggish and many people still wary of returning to entertainment venues, a hunk of purchasing has moved to goods — particularly “durables” like cars, electronics and building materials for housing — for which production and distribution capacity is limited.

 

It’s a classic economic case of “too much money chasing too few goods,” resulting in both higher prices and, given the extreme surge in demand, shortages. A spending increase of the magnitude we’re seeing — 25 percent on durable goods in 2021 over 2020, according to the Bureau of Economic Analysis — would have challenged the capabilities of manufacturers under the best of circumstances.

 

Rattner’s assessment lines up with a perfectly succinct and clarifying piece by Andy Puzder, the former CEO of CKE Restaurants and a senior fellow at the Pepperdine University School of Public Policy, who writes over at NR’s Capital Matters:

 

Our federal government spent an enormous amount of money on Covid-19 relief, in both absolute terms and as a share of our world-leading GDP. We’ve spent over $5.3 trillion in total, amounting to nearly 27 percent of our GDP. The European Union, which has a combined GDP almost as large as China’s, spent only about 11 percent on Covid relief. The U.K. spent just over 18 percent. Canada clocked in just shy of 20 percent. All are experiencing inflation. None are experiencing it to the extent the U.S. is.

 

When you factor in additional outlays — such as the recent $1.2 trillion “infrastructure” bill, plus our pre-pandemic annual budget deficit of about $1 trillion (which is not going away) — the federal government is spending like a drunken sailor, even compared with our most profligate competitors.

 

The first $4 trillion or so in bipartisan Covid relief was arguably justifiable. If you plot out the inflation rate from the start of the pandemic, the relatively modest increase over the course of 2020 merely canceled out the precipitous drop in inflation that took place early in the pandemic, when demand was suddenly cut by lockdowns.

 

But inflation took off in early 2021, when the Biden administration insisted on another $1.9 trillion in Covid relief because the new president wanted to take credit for the inevitable post-pandemic recovery.

 

In other words, with an economy that shrunk a little to about $21 trillion in 2021, the U.S. government chose to borrow about $2 trillion to $2.5 trillion or so more than it really needed and tossed it out from sea to shining sea as companies were already hiring after the worst initial months of the pandemic. That’s a whole lot of boosted demand, without a commensurate increase in supply. Sure, the supply-chain problems and labor shortages don’t help, but it all starts with the government throwing around gobs of money and not remembering the lesson from Duck Tales: If you make everyone a millionaire, every producer will hike prices, because now all their customers are millionaires.

 

And the fine print on Biden pledging “It ought to be able to start to taper off as we go through this year” is not a declaration that inflation should get better from here on out. Our Andrew Stuttaford relays the frightening assessment of Heineken chief executive Dolf van den Brin:

 

“In my 24 years in the business I’ve never seen anything like it, not even close,” van den Brink said of the cost inflation. “Across the board we are faced with crazy increases. . . . There’s no model that can handle this kind of inflation. It’s kind of off the charts. So it’s anybody’s guess . . . what the impact is going to be on volumes due to all these price increases.”

 

Now, the Federal Reserve is expected to hike interest rates — and perhaps much faster than it was expected to just a month or so ago. Last year, just paying the interest on the national debt came to $413 billion. This year, if interest rates get higher, we’ll be paying more.

 

It is ironic that the economics crowd is currently having a loud and angry argument about “modern monetary theory” — the notion that because the U.S. Treasury creates the money, the federal government can spend as much as it likes year after year and everything will turn out just fine. We’ve been inadvertently practicing “modern monetary theory” for a long while without formally declaring it; this is what happens when no one in Washington even pretends to care about the deficit and the debt. Spending is high and bad when at least one of the parties pretends to care; when everybody, including most Republicans, stop pretending to care, the borrowing and spending gets so high that it sets off runaway inflation.

 

It would be a better world if lawmakers actually cared about the deficit and debt. But pretending to care, or needing to look like they care, forced them to mitigate their spending proposals at least a bit. The pandemic, the rise of a more leftist Democratic Party, and Democratic control of Congress all aligned to boost federal spending way higher than it had ever been before.

 

And now we’re paying for all of that “free” money.

No comments: