The Road to Stagflation Is Paved with Bidenomics

National Review Online

Friday, April 26, 2024

 

The first-quarter GDP report disappointed, with annualized growth at only 1.6 percent. At the same time, core PCE inflation, the measure the Fed prefers over the CPI, was 3.7 percent year over year. That’s nearly double the Fed’s long-run target of 2 percent. It’s a good market principle not to react too strongly to one quarter’s numbers, and bond investors seem to have focused more on the PCE data (which reinforced existing fears on inflation and cast another shadow over hopes of rate cuts) than on the GDP report. Yields on ten-year Treasuries went up above 4.7 percent.

 

Despite low unemployment and reasonably strong growth in 2023, the federal government has continued to deficit spend as though the U.S. is in the depths of a massive recession. That spending, and the tranches of debt issuance that accompany it, crowds out private economic activity. It dries up private access to capital and increases pressure on interest rates, which pushes up borrowing costs for businesses looking to build and expand and for individuals looking to buy cars and homes.

 

It also adds inflationary pressure to the economy, which the Fed is supposed to counteract with higher interest rates. Fiscal policy continues to work against monetary policy. The money supply as measured by M2 began to decline in April 2022 as the Fed tightened. It has since flattened out. The long and variable lags of monetary policy might mean that the decline in economic performance one would expect from such a decline in the money supply is finally starting.

 

Yet inflation remains persistent, stuck between 3 percent and 3.8 percent year over year, as measured by the CPI, every month since June 2023. That means it will be hard for the Fed to justify rate cuts while also fulfilling its price-stability mandate from Congress.

 

Expect pressure on the Fed, especially from Democrats, to increase in the coming months as elections approach. They will likely demand rate cuts and blame the Fed for wrecking an economy that is less healthy than some assume. More progressive Democrats, such as Senator Elizabeth Warren, have already spoken of Jerome Powell as a cartoon villain for years.

 

Democrats wanted to spike the football last year, celebrating “Bidenomics” when growth numbers were looking good. Now they have all but banished the term, while free-market advocacy group Americans for Prosperity has bought the web domain bidenomics.com to explain why government-led growth isn’t all it’s cracked up to be.

 

They point out that overall prices are up 19.4 percent since Biden took office, and though nominal wages have increased, cumulative inflation over the same period has meant real hourly wages have slightly declined. Meanwhile the higher interest rates needed to squeeze out inflation aren’t just bad for Americans as home buyers. They are bad for Americans as taxpayers, with interest on the debt costing more than the defense budget last year.

 

The cornerstones of Biden’s economic policy have all been government-based: the infrastructure law, the CHIPS Act, the American Rescue Plan Act, and the so-called Inflation Reduction Act. Together (and, indeed, individually) they represent a massive injection of government spending — and with it, government control — into the U.S. economy. The president wants to pair these moves with tax hikes targeting investment, such as a new tax on unrealized capital gains, which would only discourage the private investment that will be needed if the country is to have any chance of growing its way out of its debt trap.

 

Not too much importance should be attached to one quarter’s numbers, but they still can be seen as a warning of what to expect from an economic policy that puts government in the driver’s seat while, to mix metaphors, throwing private initiative under the (electric) bus.