Joe Biden created the American inflation mess – and now he’s panicking

The White House, which has been complacent for months, is suddenly in a panic looking for scapegoats. There is much truth in their claims that inflation is primarily a symptom of the reopening of the economy, logistical problems and soaring commodity prices – supply-side challenges where tightening monetary policy would not help.

Nominal GDP (ie total US consumption) was at a level that was largely behind the pre-crisis trend of the last quarter. It therefore makes sense to ask: do we want central banks to sharply tighten demand in response to events that are largely beyond their control?

But in thinking about the right monetary response, we should avoid too much laxity of Biden’s White House. The risk of inflation becoming unbound and volatile was predictable, so former Treasury Secretary Larry Summers called for limiting more “tax incentives” earlier this year.

Biden’s U.S. rescue plan paid people not to work when the economy reopened and flooded households already flooded with money with it. In other words, it exacerbated supply constraints and added fuel to the fire for a boom in spending amid expansionary monetary policy, even though capacity was clearly lacking.

While some beneficiaries of generosity are in a better position, total real average earnings per hour are declining by 1.2 percent year-on-year. And this decline in living standards due to higher prices raises fears of “fiscal dominance” – the idea that the Federal Reserve supports government borrowing and does not ensure price stability. Summers noted that this inflationary spirit will be difficult to re-bottle.

To some extent, economic tribes talk about this past each other. After all, the best bet is that U.S. inflation will be “transient” if we mean that supply will eventually loosen and U.S. central banks can and will eventually control medium-term inflation. But all incentives were exaggerated, which raised price levels and risked at least long-term price stability by changing public perceptions.

It is not surprising, therefore, that Biden, after hearing the figures, wanted to “reiterate my commitment to the independence of the US Federal Reserve to monitor inflation and take the necessary measures to combat it.”

His own credibility didn’t help here doubts the future of US Federal Reserve Chairman Jay Powell. Progressives want Biden to replace Powell with Fed Governor Lael Brainard, who is more in favor of activism on banking regulation and climate change. Given that inflation could soon test the Fed’s independence, the president might consider the signal he would get today by appointing a president who is more politically favorable to his agenda.

Not that the Biden administration blames Powell for today’s inflation. No: the administration is looking for other booges.

The 1970s showed that when inflation rises, politicians often blame industry and resort to economically harmful price controls. Biden followed suit and instructed his national economic council to investigate whether there was a “price increase” in the energy sector – that is, companies that use market power to raise prices to an unconscious level. Any oppressive price control would, of course, lead to a shortage of energy. However, it would allow Biden to claim to be “acting” in saving the cost of living.