Biden's Plan to Fight Inflation

By now, you’ve probably read (or at least seen coverage of) President Biden’s op-Ed in today’s Wall Street Journal. And you probably know that the president met with Jerome Powell in the Oval Office just a short time ago.

There’s nothing particularly important (let alone unusual) about a president getting together with his Fed chair to talk about the broader economy. In this case, the two men were expected to discuss the path of the recovery, supply chain disruptions, the impact of the Russian invasion on global energy prices, and of course the near-term outlook for inflation.

Some have argued that the meeting was little more than a photo-op to try to reassure the public that policymakers are serious about solving the inflation problem. Whatever you might think about the meeting, it’s not going to change anything of substance.

At this point, the president’s plan to bring down inflation can be summed up as follows:

1. Leave the Fed alone to hike rates and slow the economy

2. Take proactive steps to reduce some costs and build more capacity

3. Take proactive steps to cut the fiscal deficit even more

I joined Bloomberg TV’s David Westin to talk about this at noon today.

We mostly focused on #2. And while I’m sympathetic to just about everything the president laid out in his opEd—investing in clean energy, cracking down on ocean freight companies, lowering health care costs by allowing Medicare to negotiate prescription drug prices, investing in child and elder care—most of these things either require Congress to pass legislation (good luck with that) or they’re policies that won’t do a lot to bring down inflation in the near term.

On #3, I have a very different view. The deficit is already collapsing. It has plunged from $2.8T in 2021 to around $1T this year. Some of the reduction is simply due to the fact that we have a faster growing economy, which naturally generates higher federal revenue via a progressive tax code. The bulk of the reduction, however, is coming from the active withdrawal of fiscal support—e.g. the $1,400 checks that went to most Americans last year ($350B in stimulus) is done. The expanded (CTC) child tax credit ($110B) lapsed in December. Student loan repayments are likely to start back up for tens of millions of Americans, robbing the economy of substantial spending beginning in a few months. Shut-off moratoriums just expired, leaving families drowning in utility debt ($23B in arrears as of March 1). And the list goes on….

Parse Powell’s comments carefully, and I suspect he probably knows it too. The combination of fiscal tightening that is already baked in and the tightening of financial conditions that Powell is engineering from his helm at the Fed, is raising the risk of recession.

That doesn’t mean that a recession is imminent or even inevitable this year or next. Heather Long has a nice piece up at The Washington Post on the balance of risks.

But there is little doubt in my mind that some of what we’re doing to fight inflation threatens the recovery. And some of it might even be counterproductive, meaning that inflation could trend higher rather than lower. That’s not my base case, given everything that has to be taken into consideration, but there’s an MMT argument that is worth articulating.

It’s related to Biden’s #1 inflation fighting strategy, and it’s the topic of tomorrow’s post, which is part of a series I launched last week. If you missed the first one, you can find it here.

As always, thank you for reading.