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Biden’s plan to fight inflation

By now, you’ve probably read (or at least seen the coverage of) President Biden’s opinion in today’s Wall Street Journal. And you probably know that the president met with Jerome Powell in the Oval Office not long ago.

There is nothing particularly important (let alone unusual) about a president meeting with his Fed chair to discuss the broader economy. In that event, the two men were expected to discuss the road to recovery, supply chain disruptions, the impact of the Russian invasion on global energy prices and, of course, the outlook for short term 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 think of the meeting, nothing fundamental will change.

At this point, the president’s plan to reduce inflation can be summarized as follows:

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

  2. Take proactive steps to reduce some costs and increase capacity

  3. Take proactive steps to further reduce the fiscal deficit

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

We focused mostly on No. 2. And while I’m sympathetic to almost everything the president laid out in his remarks: investing in clean energy, cracking down on shipping companies, lowering health care costs by allowing to Medicare negotiating prescription drug prices, investing in child and senior care… most of these things require Congress to pass legislation (good luck with that) or are policies that won’t do much to reduce inflation at near term

On #3, I have a very different take. The deficit is already collapsing. It has dropped from $2.8 million in 2021 to approx $1 million this year. Part of the reduction is simply because we have a faster-growing economy, which naturally generates higher federal revenue through a progressive tax code. Most of the reduction, however, comes from the active withdrawal of fiscal support; for example, the $1,400 checks that went to most Americans last year ($350 million in stimulus) have been made. The Expanded Child Tax Credit (CTC) ($110 million) expired in December. Student loan repayments are likely to start up again for tens of millions of Americans, robbing the economy of substantial spending within months. The foreclosure moratoriums just expired, leaving families drowning in utility debt ($23 million in arrears as of March 1). And the list goes on…

Analyze Powell’s comments carefully, and I suspect he probably knows this too. The combination of fiscal tightening viz already in the oven and the tightening of financial conditions that Powell is designing from his helm at the Fed is increasing the risk of recession.

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

But I have no doubt that some of what we are doing to fight inflation threatens the recovery. And some of them may even be counterproductive, meaning inflation could trend higher rather than lower. This is not my base case, given all that there is to consider, but there is an MMT argument worth articulating.

It’s related to Biden’s No. 1 anti-inflation strategy and is the subject of tomorrow’s post, part of a series I launched last week. If you missed the first one, you can find it here.

As always, thanks for reading.


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