Wednesday, June 1, 2022

No, Biden’s American Rescue Plan Did Not Cause Inflation

US President Joe Biden deserves blame for many things that have not gone well. For example, we’ve written extensively about how his administration is determined to lower the budget deficit, which is causing financial stress across the country and, arguably, the world. His administration has so far failed to unite the country, and vaccine rates have been stubbornly low compared to other developed nations. He should have made at-home testing kits available for Americans sooner.

That all being said, Biden and his administration is getting far too much blame for the high rates of inflation we’ve experienced of late. This Twitter thread from Mark Zandi, Chief Economist at Moody’s, sums it up best. He writes:

What’s more to blame for the painfully high inflation, strong demand and thus government policies like the American Rescue Plan or scrambled global supply chains and labor markets and thus the pandemic?  It’s supply and the pandemic.

To be sure, demand was behind the resurgent inflation this time last year as the vaccines allowed the economy to quickly reopen and the ARP [American Rescue Plan] shored up pandemic-stricken households and small businesses. But that was more a feature than bug, as inflation had long been too low.

The problematic inflation surge happened later when the Delta wave of the pandemic hit. Delta was a huge surprise and did big damage, particularly to Asia where most supply chains begin. It also made lots of people sick and unable or fearful to work. Thus, the labor shortages.

Note that inflation is up a lot across the globe. Some places more than others, like here at home, but this is mostly due to differences in how inflation is measured. Hard to blame U.S. fiscal policy for the higher inflation in Europe, Latin America or Asia. Blame the pandemic.

Mainstream neoliberal economists like Larry Summers have been doing victory laps over their supposed prescient inflation calls, having argued the ARP was too big. This narrative is consistent with what Wall St, and probably most Americans, believe as well. In fact, Summers’ more nuanced views seem reasonable compared to most people on Wall St. But they’re all wrong. The EU and UK did not do anything close to the “money printing” the US did, and they are experienced record high price increases. Inflation is high because real costs have gone up. “Money printing” is a result of real cost increases, not a cause, as we’ve written about before.

There is also growing evidence that lax antitrust enforcement has led to increased market share concentration across industries, which gives dominant corporations better pricing power and has contributed to inflation. Corporate profit margins are near all-time highs, which is atypical for inflationary periods. The Boston Fed recently published a paper that acknowledges this problem.

These narratives are frustrating, because they are so intellectually intoxicating and spread so easily. It is generally accepted to be true that QE was the reason that asset prices in the US have gone relentlessly up since the GFC, despite the fact that other areas like the EU and Japan carried out more extreme programs and didn’t experience the same magnitude of asset price appreciation. This is first-level, lazy analysis that is pervasive on Wall St. And people get paid outrageous amounts of money to peddle these lies. It’s ridiculous. We can, and must, do better.

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On Inflation

[Note: I originally started writing this piece on December 23, 2022, then got held up with holiday festivities. More posts for the new year ...