Inflation kicked in earlier this year, and that’s what happened when the president, Congress and the Federal Reserve were criticized for overstimulating the economy in response to the pandemic. We heard it again when it reported a decline in the economy, provoking dire and exaggerated recession forecasts from Republicans. We are embracing the same fallacies that poke a package of climate, tax, and healthcare initiatives fancifully marketed as
After lengthy debate, Senate nudges toward passage of anti-inflation bill
The heart of the truth is peppered with all these criticisms, but they stem from faulty mental models of the economy and how it works. Now let’s step back and see what’s really going on.
In the spring of 2020, as a global pandemic threatened to plunge the global economy into a nasty recession, central banks and governments around the world effectively pledged trillions of dollars to prevent business closures and layoffs. printed to workers while providing households with an income to live on. It worked: After a terrifying few months of stock market crashes and rising unemployment, financial markets recovered, most businesses remained open, and most people looking for work were able to find work.
Unfortunately, as some of us have warned, the government will continue to provide this fiscal and monetary stimulus for too long.
The philanthropic explanation was that, at least in the United States, officials were determined not to repeat what they believed was a mistake of excessive cowardice during the 2008 financial crisis and recession. be short-lived. An equally plausible explanation is that President Biden and the Democratic Congress are keen to “not waste a good crisis” and use it to increase public spending and public spending to achieve economic, social and environmental justice. It justified a significant increase in investment.
What the Inflation Control Act is and how it affects you
At the same time, the Federal Reserve (whose chair happened to be reappointed, not coincidentally) was reluctant to begin curtailing its extraordinary money printing for fear of bursting the bubble it had created with equities. It was a target. Weakening property and labor markets were tight enough to ultimately lead to higher wages for low-skilled workers.
What is often forgotten is that before the pandemic, and even before all this economic stimulus, the US economy was already significantly out of balance. I have lived far beyond. It had huge and persistent trade and fiscal deficits made possible by an overvalued dollar, artificially low interest rates, and the willingness to recycle the surpluses of trading partners into the American economy. In fact, these imbalances have been going on for so long that nearly everyone has come to think it’s the new normal and could last forever.
Given that pre-pandemic prosperity already relied on massive fiscal and monetary stimulus, it is surprising that trillions of dollars in additional stimulus over the next two years would lead to higher prices and wages. It’s not what you should do. In fact, that was the point of these relief efforts. To prevent a deflationary spiral, set a floor on household income, stimulate investment, and push up the prices of stocks, bank loans, and real estate.
In hindsight, it’s clear that policy makers ignored the warning and went too far. But it is equally true that economic policy is not a science, and that the global economy is not a system controlled by a few dials in Washington.
US policymakers misjudged the threat of inflation until it was too late
Of course, Democrats argue that inflation will be greatly contained by slimming tax and appropriation bills that close corporate tax loopholes, widen and widen clean energy tax credits, and expand health insurance subsidies for the working class. is equally dubious. And give Medicare the power to negotiate the price of a dozen overpriced drugs.
The Congressional Budget Office estimates that the Inflation Reduction Act is likely to change inflation by less than a tenth over the next two years, but it is unclear whether that change will be higher or lower.
Even over the next five years, the package passed by Congress would reduce the federal budget deficit by $25 billion, according to the Committee on a Responsible Federal Budget. Regardless of the final figures, this action would do little to reduce the annual federal budget deficit, which is projected to hover at an unsustainable 5% of GDP over the next decade.
Equally absurd is the Republican criticism that the same officials who mistakenly caused inflation by over-stimulating, now withdrawing it, have ignited the fuse of a long and deep recession.
First of all, most of us are sensitive enough to be able to tell the difference between a national economy producing 1 percent more goods and services than the previous year and an economy producing 1 percent less. I don’t have a good economic antenna. The gross domestic product, GDP, is measured incorrectly and the difference is too small. The partisan hyperventilating whether we are in recession is more about politics than economics.
More importantly, given that the economy and financial markets are coming out of deliberately induced high sugar prices, the fact that production, employment, home sales and stock prices may fall a bit is a healthy move. and is also necessary. Last year, the economy “created” more than 6 million jobs for her, up 4%. At a time when immigration is curtailed and baby boomer retirees abound, there aren’t enough workers to keep up with that pace or fill the vacancies that already exist. And with government and household spending and borrowing off record levels by all of the stimulus, even if the unemployment rate were to rise from its current historic and unsustainable low of 3.5%. is hardly a surprise.
Sure, some workers may lose their jobs as the economy adjusts to more sustainable levels of spending and output, but evidence from employers suggests that most people in most places People are not finding jobs because some officials have misconfigured the macroeconomic dial in Washington. Or because educational institutions and labor market institutions are not producing the trained workers companies need.
Adjusting to a more stable and sustainable economic balance will not be painful.
Stocks and real estate must fall in value relative to others, and some of the loans used to purchase them are written down.
Some workers will have to move to acquire new skills and find jobs, while employers will have to move to find workers and spend more to train them. maybe.
To attract and retain workers, the wages paid for low-skilled jobs must be raised, while the inflated earnings of top workers must be reduced.
Government spending needs to be more in line with government revenues. Households need to borrow less and save more. Interest rates would need to be closer to historic levels, but the value of the dollar would have to fall, raising the relative prices of imports and lowering the apparent price of what we produce for the rest of the world. .
Instead of rebalancing things, it’s about living through the cycle of booms and busts of the last 30 years. Such an economy will need more fiscal and monetary stimulus than ever before to keep it from slipping into recession. It will also continue to be an economy where the rich get richer and the poor get poorer. It will continue to be an economy that becomes increasingly dangerously indebted to the rest of the world.
In short, a healthy and sustainable economy is not one that requires government officials to constantly and dramatically adjust Washington’s macroeconomic dials to keep things in balance. Rather, it relies on the natural self-correcting mechanisms of open, competitive and well-regulated markets.
Stephen Pearlstein is a longtime business and economics columnist for The Washington Post. “moral capitalism,” Published by St Martin’s Press. Robinson Professor of Public Affairs at George Mason University.