The U.S. central bank must move “expeditiously” to bring too-high inflation to heel, Federal Reserve Chair Jerome Powell said on Monday, and will, if needed, use bigger-than-usual interest rate hikes to do so.
“The labor market is very strong, and inflation is much too high,” Powell told a National Association for Business Economics conference. “There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability.”
In particular, he added, “if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”
Fed policymakers last week raised interest rates for the first time in three years and signaled ongoing rate hikes ahead. Most see the short-term policy rate – pinned for two years near zero – at 1.9% by the end of this year, a pace that could be achieved with quarter-percentage-point increases at each of their next six policy meetings.
By the end of next year, Fed policymakers expect the central bank’s benchmark overnight interest rate to be at 2.8%, bringing borrowing costs to a level where they would actually start biting into growth. Most Fed policymakers see the “neutral” level as somewhere between 2.25% and 2.5%.
Powell repeated on Monday that the Fed’s reductions to its massive balance sheet could start by May, a process that could further tighten financial conditions.
U.S. stocks extended earlier losses after his remarks and traders boosted bets that the Fed will deliver a half-percentage-point rate hike at its policy meeting in May.
“This is not just going to be a near-term tactical phenomenon,” said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments in New York. “This is a more strategic type of messaging, I think, from the Fed.”
A consensus for more aggressive tightening – or at least an openness to it – appears to be growing
Atlanta Fed President Raphael Bostic, who expects a slightly gentler path of rate increases than most of his colleagues, said earlier on Monday he is open to bigger-than-usual rate hikes “if that’s what the data suggests is appropriate.”
Speaking on Friday, Fed Governor Chris Waller said he would favor a series of half-percentage point rate increases to have a quicker impact on inflation.
The U.S. unemployment rate currently is at 3.8% and per-person job vacancies are at a record high, a combination that’s pushing up wages faster than is sustainable.
“There’s excess demand,” Powell said, adding that “in principle” less accommodative monetary policy could reduce pressure in the labor market and help stabilize inflation without pushing up unemployment, generating a “soft landing” rather than a recession.
Inflation by the Fed’s preferred gauge is three times the central bank’s 2% goal, pushed upward by snarled supply chains that have taken longer to fix than most had expected and that could get worse as China responds to new COVID-19 surges with fresh lockdowns.
Adding to the pressure on prices, Russia’s war in Ukraine is pushing up the cost of oil, threatening to move inflation even higher. The United States, now the world’s biggest oil producer, is better able to withstand an oil shock now than in the 1970s, Powell noted.
Although the Fed in normal times would not likely tighten monetary policy to address what in the end may be a temporary spike in commodity prices, Powell said, “the risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher.”
Last year, the Fed repeatedly forecast that supply chain pressures would ease and then was repeatedly disappointed.
“As we set policy, we will be looking to actual progress on these issues and not assuming significant near-term supply-side relief,” Powell said on Monday. Policymakers began this year expecting inflation would peak this quarter and cool in the second half of the year.
“That story has already fallen apart,” Powell said. “To the extent it continues to fall apart, my colleagues and I may well reach the conclusion we’ll need to move more quickly and, if so, we’ll do so.”
Fed policymakers hope to rein in inflation without stomping on growth or sending unemployment back up, and their forecasts released last week suggest they see a path for that, with the median view for inflation falling to 2.3% by 2024 but unemployment still at 3.6%.
Powell said he expects inflation to fall to “near 2%” over the next three years, and that while a “soft landing” may not be straightforward, there is plenty of historical precedent.
“The economy is very strong and is well-positioned to handle tighter monetary policy,” he said
Professional golfers competing for million-dollar prizes may not appear to be disadvantaged in the labor market, but they actually provide a good example of America’s deteriorating Gig Economy landscape nationwide. As independent contractors, not playing for a team or working for an employer, pro golfers are in a class with millions of hard-working folks who seriously lack rudimentary legal and ethical protections in their jobs.
Unlike their peers in baseball, football and basketball, PGA Tour golfers have to cover their own expenses, from travel to coaching to health services. Caddies alone can cost $3,000 per tournament, in addition to a percentage of the golfer’s winnings. But worse, the PGA Tour restricts ways for players to earn extra money, including banning participation in competitor tournaments, appearance fees, and media and licensing income. At the same time, unlike pro sports leagues, the Tour does not even provide golfers with minimum compensation.
In order to play in the Asian Tour last month (February 3rd-6th), at the same time as a PGA Tour event in Pebble Beach, some of the biggest names in golf, including Dustin Johnson, Bryson DeChambeau, and Phil Mickelson, had to beg the Commissioner for a waiver. It was reluctantly granted, but only if the players guaranteed they would play in Pebble Beach in future years. What kind of independence is that?
Rory McIlroy, four-time champion in golf’s Majors and chairman of the PGA Tour Players Council, decided not to play in either event that weekend, but in an interview Jan. 26, he said of golfers who chose the Asian Tour event: “At the end of the day, it’s their job and livelihood…. I like being my own boss. I don’t want to be told what to do. I don’t want to be told where to show up or when to show up.”
The good news is that protecting workers’ rights in a Gig Economy is an issue gaining traction in Washington. The Biden Administration supports the idea that tens of millions of workers should have the flexibility of independent contractor status and still be treated fairly, with and proper protections and benefits.
In its landmark ruling against the NCAA’s restrictions on the money-making activities of college athletes, the U.S. Supreme Court last June reportedly seemed to find that the NCAA provided no evidence in its filings to suggest that fans would be less interested in college sports if athletes receive greater benefits. Likewise, the PGA has scant evidence to suggest that pro golfers participating in supplemental competitions, or making money outside of the event, would negatively impact the PGA Tour.
As of 2019, there were 36 million U.S. workers subject to non-competes, denying them the right to sell their services to any organization they wish. Non-competes violate the spirit of the Gig Economy, harm wage growth, and even limit the ability of workers to leave and start their own business. Fans of the PGA Tour ideally want the best for the players, and the sport overall. It would be in the fans interest to grow the sport by supporting the end of the PGA Tour’s non-compete practices.
Last year, Sen. Chris Murphy (D-Conn.) led the charge against anti-competitive practices with an astute legislative proposal, the Workforce Mobility Act, which would limit non-competes to extraordinary cases and require employers to inform their employees explicitly of the limitations when a non-compete is allowed.
California has been a leader by largely prohibiting non-competes, and President Biden’s wide-ranging Executive Order last year encouraged the Federal Trade Commission (FTC) to restrict or ban such agreements, including the type the PGA Tour currently imposes.
It can be perfectly appropriate for employers to protect their trade secrets and intellectual property, but the idea that employers should be able to broadly limit an employee’s future employment options and earning potential is simply unfair and sounds like an unjust contract of adhesion.
This is a conversation across all industries. Thousands of lawsuits are pending that would extend the rights of Gig Economy workers, and the Administration recognizes that independent contractors lack equity in reasonably seeking earnings because the scales are tipped heavily in the favor of large employers and governing bodies.
If PGA Tour golfers lack the ability to seek their livelihoods freely and fairly, then imagine how little power lower-income independent contractors have to secure decent treatment and adequate compensation. Deliberate steps need to be taken now to truly protect Americans who want and need flexibility in the workplace. Yes, including professional golfers.
The White House's latest attempt to scapegoat rising prices ignores everything that happened before the past three weeks.
Ten months ago, Jeremy Siegel issued a dire warning about the trajectory of prices.
“The money supply since the beginning of the pandemic, so a little over a year, has gone up almost 30 percent. Now, that money is not going to disappear. That money is going to find its way into spending and into higher prices,” Siegel, a professor of finance at the University of Pennsylvania’s Wharton School, told CNBC during an interview on May 14. “Over the next two, three years we could easily have 20 percent inflation with this increase in the money supply.”
He was hardly the only one sounding the alarm. A few months earlier, before Congress approved President Joe Biden’s $1.9 trillion American Rescue Plan, several prominent economists had warned that the stimulus bill—the third major one passed since the outbreak of COVID-19 just a year earlier—was too big and threatened to overheat the economy.
Among the critics were people like Lawrence Summers, who served as Treasury Secretary during the Obama administration. “There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation,” Summers warned in a Washington Post op-ed in February 2021. “Administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply.”
“I think we do not need to spend $1.9 trillion…and we should have a smaller program,” Olivier Blanchard, the former chairman of the International Monetary Fund, wrote on Twitter in response to Summers’ op-ed. Biden’s plan to shovel another $1.9 trillion into the economy was coming on top of unprecedented fiscal stimulus and high personal savings rates (due to the pandemic). Americans were already poised to spend a lot more money chasing the same amount of goods as the pandemic waned, and the increase in demand would require impossible levels of output to match. “Strong inflation” would be the natural result, he warned.
“This would not be overheating,” he wrote. “It would be starting a fire.”
By July, a few months after the American Rescue Plan passed, economists surveyed by The Wall Street Journal said Americans should be bracing for levels of inflation not seen in more than 20 years. That dire prediction was an underestimation.
This history matters because the White House’s latest attempt to explain away inflation rates that have hit their highest levels in 40 years is to blame Russian President Vladimir Putin, and the war he has started in Ukraine, for the whole mess. After the Labor Department released new data last week showing that inflation had jumped to 7.9 percent over the past year, the White House responded with a statement claiming that “today’s inflation report is a reminder that Americans’ budgets are being stretched by price increases and families are starting to feel the impacts of Putin’s price hike.”
The argument is that Russia’s invasion of Ukraine—and the global response to it, which has included cutting off purchases of Russian oil and gas—are pushing prices higher throughout the economy. “Make no mistake, the current spike in gas prices is largely the fault of Vladimir Putin and has nothing to do with the American Rescue Plan,” Biden said Friday.
It’s true that gas prices have spiked dramatically in the weeks since Russian troops invaded Ukraine. But Biden’s attempt to pin a year of steadily rising prices on the events of the past few weeks makes little sense.
For one thing, last week’s report from the Labor Department showing that inflation had hit 7.9 percent looked at prices from February 2021 through February 2022. Putin’s invasion of Ukraine began on February 24, so the White House is asking you to ignore 361 days of data in order to focus on what happened during the last four.
It’s certainly possible that the war in Ukraine—and the disruptions it has caused to global fuel and food supply chains—will put more upward pressure on prices. But that information won’t be visible in the government’s official data until the next consumer price index report is released in early April.
What about Biden’s more narrow claim: that rising gas prices are largely to blame for inflation. It’s true that higher gas prices will push other prices higher as a result—because higher fuel prices make it more expensive to ship anything from place to place. And the White House is correct that energy prices are rising faster than prices overall. Overall energy prices are up 25.6 percent since last year, and gasoline prices are up 38 percent, according to the Labor Department’s most recent data (which, again, captures prices through the end of February).
But if that’s all Putin’s fault, how do you explain the fact that energy prices—and gasoline prices, specifically—had been rising faster than just about anything else for much of the past year? In November, the Labor Department reported that energy prices were up 33 percent and gasoline prices up 58 percent over the previous year. In August, those numbers were 25 percent and 42 percent, respectively. What’s happening here seems to run a lot deeper than the events of the past few weeks.
“Yes, Putin’s invasion is making a huge difference. But demand for gasoline surged much earlier when consumers, with money in the bank and uninterested in flying because of COVID-19 concerns, put family cars on the road in the midst of the great COVID shutdown, making the number of miles traveled in spring 2021 rise to new heights,” wrote Bruce Yandle, former executive director of the Federal Trade Commission and economist at the Mercatus Center, last week in Reason.
Finally, this brings us back around to the economists who were warning last year that Biden’s stimulus bill would be a recipe for high inflation. It’s unlikely that Siegel, Summers, and the rest had a crystal ball that could predict Russia’s invasion of Ukraine.
What they were predicting—and, indeed, what we are now seeing—was persistently rising prices due to an excessive amount of money being dumped into the economy. Any attempt by the Biden administration to explain inflation that doesn’t include a hard look at its own policies is simply dishonest.
President Joe Biden has a problem with numbers. He can’t make them add up and it’s not clear that he knows what they mean. He’s so devoted to his progressive narrative that he becomes confused when the data doesn’t support the conclusions he and his economic team want to reach.
This leads him to say all kinds of wacky things about taxes and prices and spending and inflation that are undermining the American public’s confidence in the U.S. economy. It is possible, as has been proved more than once over the last 25 years, to talk us into a recession. And, with the Atlanta Fed projecting zero growth for the first quarter of 2022, the president and his team may be doing just that.
Consider Biden’s remarks in his most recent State of the Union Address. As a way of pumping up the enthusiasm over his plan to fight inflation and rebuild the American economy following the lockdowns, he criticized the pro-growth tax cuts enacted under his predecessor. “Unlike the $2 trillion tax cut passed in the previous administration that benefited the top 1 percent of Americans,” he said, his American Rescue Plan “helped working people – and left no one behind.”
That, to put it mildly, is an exaggeration of the worst order. The Trump tax cuts benefited the top 1 percent of income earners because they benefited everyone who pays federal income taxes. The only people they didn’t help directly were the roughly 50 percent of Americans who don’t make enough money to pay income tax to Uncle Sam.
Some people, including Mr. Biden, think that’s unfair. Then again these are the same people who confuse tax avoidance – which is the lawful attempt to minimize one’s tax payment – with tax evasion. The latter, which is the practice of not paying taxes legitimately owed, is illegal. If the president and his congressional allies like Senate Finance Committee Chairman Ron Wyden, D-Ore., had their way the former might become illegal any time now too. But that’s a matter for another day.
The Tax Cuts and Jobs Act Biden derides as only benefiting the wealthy increased the incentive for those “of means” and those who wished to someday be “of means” to make more frequent and more valuable capital investments expecting, as was shown to be the case before the pandemic-inspired lockdowns jiggered the system, that greater financial risk produced greater financial rewards.
This created an environment in which almost every American was a winner. The economy grew, jobs were created, and unemployment sank like a stone among the demographics that garner the most media attention like single women, young African-Americans and Latinos. Productivity rose and with it, as most analysts reported, so did wages.
Biden doesn’t get that. He still believes that for the rich or powerful to do well, the poor and struggle must suffer. It’s an outmoded way of thinking that most people thought died out with the Soviet Union but, as Putin’s invasion of Ukraine reminds us, some threats just never go away.
He’s got it all cocked up on energy too. Asked Thursday about rising prices at the pump, Biden blamed the war in Ukraine and the sanctions that have been imposed on Russia for the spike. That has something to do with it to be sure. The bigger cause is the way the president used what former House Majority Leader and Ph.D. economist Dick Armey calls “the invisible foot of government” to kick America’s energy independence to the curb.
The price of gasoline is rising because America’s energy sector cannot increase production to levels sufficient to meet the demand for gasoline at less than $3 per gallon. To put it another way, Biden broke the spigot by suspending oil leases, restricting exploration, reinstating economically counterproductive regulations, killing the Keystone XL pipeline and doing whatever else he and his brain trust could to conceive to force consumers to speed up their adoption of wind and solar power.
How’s that worked out? Well, since he’s come into office the average American family have seen their annual energy costs increase, by some estimates, by more than $1,000, gas prices have reached the highest level ever recorded – above $4 per gallon on average in 38 states – and congressional Democrats are once again talking about instituting a special tax on “excess” energy company profits that can be paid out to low-income individuals and families to help them deal with higher prices. To call that madness is an insult to the insane.
When asked what he plans to do, the best answer Biden could come up with was to suggest there wasn’t much he could do about it right now. Then he talked about oil companies and production increases and investments as though he understood it all. Here’s what he told the members of the Democratic National Committee Thursday night:
“We are increasing oil production with a [sic] record productivity. By the end of the year, we will have produced more oil than any time in the last number of years. … The CEOs of major oil companies have said they’ll increase investment and production… My message is: It’s time — in this time of war, it’s not a time of profit. It’s time for reinvesting in America. And they hear it. You know, there’s a — there’s an impediment to production in the United States, and it’s called ‘the bankers on Wall Street.’ And this crisis is another indication of why we need to get off dependency on fossil fuels.”
That may be confusing to follow so, to translate, in the president’s view: 1) Energy companies are bad because they profit when prices rise because the politicians have created a global crisis of the 1st order; 2) We have plenty of oil but business isn’t producing it so they can make more money; 3) The big bad bankers on Wall Street are behind it all; and, 4) We need to go green.
As they say, there’s nothing like letting the facts get in the way of a good narrative.
Biden forgot to mention a lot, including how the national average price of gas was already up by $1.14 before Russia invaded Ukraine because of the anti-fossil energy initiatives his administration had taken or announced plans to take — like the Biden SEC’s effort to force public traded companies to disclose the potential economic impact to their business from global warming and greenhouse gas production.
From the largest Cabinet Department to the smallest independent agency, the Biden administration is waging a regulatory war on fossil fuels that touches every sector of the economy. And all the president can say is “What? Who? Me?” A convenient memory lapse assisted by a fundamental misunderstanding of economics is killing off the American energy renaissance.
Thousands are dying from Russian missiles and bombs in the suburbs of Ukraine.
In response, the Biden Administration’s climate-change envoy, multimillionaire and private-jet-owning John Kerry, laments that Russian President Vladimir Putin might no longer remain his partner in reducing global warming.
“You’re going to lose people’s focus,” Kerry frets. “You’re going to lose big-country attention because they will be diverted, and I think it could have a damaging impact.”
Did the global moralist Kerry mean by “impact” the over 650 Russian missiles that impacted Ukrainian buildings and tore apart children?
Are Russian soldiers losing their green “focus”? When Putin threatens nuclear war is he merely “diverted”? Would letting off a few nukes be “damaging” to the human environment?
Climate-change moralists love humanity so much in the abstract that they must shut down its life-giving gas, coal, and oil in the concrete. And they value humans so little that they don’t worry in the here and now that ensuing fuel shortages and exorbitant costs cause wars, spike inflation, and threaten people’s ability to travel or keep warm.
The Biden Administration stopped all gas and oil production in the ANWR region of Alaska. It ended all new federal leases for drilling. It is canceling major new pipelines. It is leveraging lending agencies not to finance oil and gas drilling.
It helped force the cancellation of the EastMed pipeline that would have brought much-needed natural gas to southern Europe. And it has in just a year managed to turn the greatest oil and gas producer in the history of the world into a pathetic global fossil-fuel beggar.
Now gas is heading to well over $5 a gallon. In over-regulated blue states, it will likely hit $7.
The result is left-wing terror that the voters in the coming midterm election might rightly blame Democrats for hamstringing the American ability to travel, keep warm in winter and cool in summer, and buy affordable food.
But how will the Biden Administration square the circle of its own ideological war against oil and natural gas versus handing the advantage to our oil- and gas-producing enemies, as Russia invades Ukraine?
Or put another way, when selfish theory hits deadly reality, who loses? Answer: the American people.
President Joe Biden lifted U.S. sanctions on the Russian-German Nord Stream 2 pipeline designed to provide green Germany with loathsome, but life-saving, natural gas.
But first Biden canceled the Keystone XL pipeline in the United States. He has no problem with pipelines per se, just American ones.
While Biden doesn’t like the idea of Germany burning carbon fuel, or Putin reaping enormous profits from Berlin’s self-created dependency, or Germans importing liquified natural gas from America, Biden also does not like the idea of forcing German families to turn off their thermostats in mid-winter when there is Russian-fed war not far from Germany’s borders.
Here at home, Biden gets even crazier. As our enemies around the world reap huge profits from record high oil and gas prices, did Biden ask Alaska, North Dakota, or Texas to ramp up production?
In other words, did he ask Americans to save fellow cash-strapped Americans from a self-created energy crisis, in the way he assured the Germans that during war reality trumps theory?
Not at all.
Instead, Biden came up with the most lunatic idea in recent diplomatic history of begging autocratic and hostile regimes the world over to pump more oil to lower America’s gas prices.
For years, America has sanctioned the oil-rich Venezuelan dictatorship, a narco-terrorist state that wars on its own people and its neighbors. Now Biden is begging strongman Venezuelan President Nicolas Maduro to pump the supposedly dirty fuels America has in even greater abundance but finds it too icky to produce.
Biden also has beseeched the once sanctioned, terrorist Iranian government. He wants Tehran to help us out by upping the very oil and gas production that America has tried to curtail for years. In return, Iran is demanding a new “Iran Deal” that will soon ensure the now petro-rich theocracy the acquisition of nuclear weapons.
On the eve of the Russian invasion, Biden begged Putin to pump even more oil to supplement its current Russian imports to the United States.
Did Putin see that surreal request as yet another sign of American appeasement that might greenlight his upcoming planned invasion? In Russian eyes, was it more proof of American weakness and craziness after the humiliating flight from Afghanistan?
Biden has blasted the human rights record of Saudi Arabia’s royal family. Now he is begging the monarchy to pump more of its despised carbon-spewing oil to make up for what his administration shut down at home. Is that why the Saudi royals refused to take his call?
The moral of Biden’s oil madness?
Elite ideology divorced from reality impoverishes people and can get them killed.
Instead of taking responsibility for his self-inflicted problems and laying out solutions to fix them, Biden has repeatedly deflected blame.
he White House repeatedly uses the Russia-Ukraine conflict to blame Russian President Vladimir Putin for the crises President Joe Biden created. Even when Americans point out the administration’s hypocrisy, the White House refuses to take responsibility for the domestic problems that it knows could result in the downfall of Democrats in the upcoming midterm election.
“Inflation goes up today, the president’s statement blames the ‘Putin Price Hike.’ Are you guys just going to start blaming Putin for everything until the midterms?” Fox News’s Peter Doocy asked during the White House press briefing on Thursday.
Psaki, of course, refused to give Doocy a straight answer and instead told reporters that “we’ve seen the price of gas go up at least 75 cents since President Putin lined up troops on the border of Ukraine.”
Doocy countered by asking why the White House’s statement on January’s high inflation didn’t indict the Russian president then, especially if he was so guilty for causing the problems afflicting Americans since January of 2021, but Psaki didn’t bite.
Biden and his team at the White House will absolutely keep blaming Putin for all the domestic crises weighing on Americans because they have nothing to lose by refusing responsibility and everything to gain in the 2022 midterms.
Things in the U.S. are not going well for the Biden administration. The president’s approval rating may have slightly climbed after he made dozens of empty promises and lies at his State of the Union address but his first year in office was a complete disaster.
Under Biden’s watch, the U.S. Southern border was overwhelmed with illegal migration and increased drug trafficking, gasoline prices climbed astronomically, and the supply chain crisis hurt Americans already struggling under the weight of steadily increasing inflation.
Instead of taking responsibility for these problems and laying out solutions to fix them, the Biden administration has repeatedly deflected blame onto the pandemic and even corporate greed. One year into steadily rising and record-high energy costs, Psaki still had the guts this week to claim that high gas prices and expensive goods that have been plaguing Americans for months are Putin’s fault.
She also said they are “temporary and not long-lasting” even though the White House and the president himself previously insisted that price hikes were“expected” and would be “temporary.” Eight months after their predictions, inflation is at a 40 year high and is expected to climb higher in the coming months.
As a result, Americans do not view the administration or Democrats favorably. Just recently, Biden and his leftist allies have tried to ditch their own detrimental Covid agenda in an attempt to win over frustrated voters. So far, their plan to satiate Americans, 40 percent of whom recently testified that they were “nervous” under the Biden presidency, is not working.
Americans largely vote with their pocketbooks. When gas costs $7 a gallon in parts of the country because Biden wants to broker deals with foreign enemies instead of reinstating American energy independence, voters who agree that economic conditions are their top priority are not happy. Recent polling suggests that more Americans, 51.6 percent, disapprove of the president and vice president than approve.
Biden and his team have epically failed in multiple ways. Despite the administration’s efforts to call U.S. attention to a foreign conflict, Americans affected by Biden’s incompetence won’t forget all of the domestic crises he’s created and then tried to ignore.
The White House has nothing to lose by blaming Putin and everything to gain by ignoring the crises Biden created. The more the administration spins the narrative, with the help of corrupt corporate media, to absolve themselves of blame, the better Democrats believe they will do in this year’s key election.
For Joe Biden, the February jobs report provides a reason to celebrate. It looks like America is finally getting back to work. COVID is over. The recovery has begun – if you don’t look closely enough.
The Biden Boom, which someone is sure to call it eventually, is full of holes. Thanks to the American Rescue Plan, which the president talked up ad nauseam during the State of the Union Address, there were billions of dollars pumped into the economy without having anywhere productive to go. As a result, we got what the Republicans have taken to calling “Bidenflation” as prices rise at a rate many of us have not seen since the 1970s.
If you were born during or after the Reagan years – which kicked off a genuine “long boom” that continued far beyond his presidency – you’ve never seen anything like what we’re now seeing. That alone would blame the precipitous drop in Biden’s job approval numbers and why some polls are showing the Republicans leading the Democrats by as much as 20 points on the question of which party do you feel will do a better job handling the nation’s economic challenges.
As to inflation, it looks like the president doesn’t have a clue. In his speech Tuesday, he said the annualized increase in prices – which is hovering near 10 percent – was juiced upwards by the outsized impact the rise in the price of automobiles had on the total:
Last year, there weren’t enough semiconductors to make all the cars that people wanted to buy.
And guess what, prices of automobiles went up. So – we have a choice.
One way to fight inflation is to drive down wages and make Americans poorer.
I have a better plan to fight inflation.
Yes, he has a plan – but how can we trust it when it’s clear he doesn’t get the fundamentals. As the Committee to Unleash Prosperity put it in the Thursday edition of its Hotline:
“We’re still scratching our heads trying to figure out what the White House strategy is for bringing down inflation which is now running between 7% and 10% depending on the measure used…. Then old Joe told a whopper when he said that new vehicles accounted for a third of all inflation over the last year. New vehicles accounted for only 6% of inflation. Even if you add new and used vehicles together, it accounts for only 17% of inflation, half of what he claimed. Inflation is everywhere right now.”
The Biden plan, whatever it is, doesn’t build back anything better. It relies on price controls and government intervention in the marketplace to bring Bidenflation to heel. The problem is it won’t work now any better than it did when presidents in both parties tried in the 70s. What he’s bringing back is Jimmy Carter 2.0, only without the federal deregulatory efforts that were the one bright spot in four otherwise malaise-filled years.
Still, the job growth in February 2022 was impressive. The economy added a total of 687,000 jobs, 654,000 of them scattered throughout the private sector rather than confined to just a few parts of the commercial and industrial sectors. The service sector added more than half a million workers while the leisure and hospitality industries badly battered by the lockdowns added almost 200,000 workers.
These are all positive signs. The good news is the U.S. labor market is recovering. The bad news is that Joe Biden thinks he and his American Rescue Plan are responsible for it all because, as he said Thursday night, it “created jobs. Lots of jobs.”
Biden didn’t create a thing. It was the Republican governors who ended the lockdowns who are responsible for the job growth America has experienced coming out of the pandemic. Month over month, most of the top ten states that had the most “new hires” were led by the GOP while the states that showed no job growth or continued to lose jobs were run by folks who practice Bidenomics.
In his hubris, in the rush to demonstrate his policies are having a positive impact on the economy, he’s claiming credit for jobs that existed until the people who had them were, along with most everyone else, forced to stay home in a futile attempt to stop the spread of COVID. “Our economy created over 6.5 million new jobs just last year, more jobs created in one year than ever before in the history of America,” Biden said, an easy claim to make when the people who see the economy as you do were responsible for killing those jobs (or their predecessor positions in the first place). It’s an assertion that makes as much sense as the observation from a soldier in the field in South Vietnam who explained to a reporter how “We had to burn the village down to save it.”
What’s next? That depends on whether the Republicans in Congress can continue to hold the line and block any further assistance spending packages. As economist E.J. Antoni of the Texas Public Policy Foundation told me, the U.S. economy is currently experiencing “strong, widespread job growth, undermined by inflation.”
“We are at 99 percent of the jobs we had before the pandemic so there’s no reason for any additional stimulus,” Antoni, who also advises the Committee to Unleash Prosperity said. The real problem, he continued “is that there is too much money sloshing around while real wages are plummeting.”
Bidenflation is the real economic enemy, not joblessness. Forecasters had already “baked into the cake” some large price increases for the coming year before the crisis in Ukraine began. That means, Antoni said, “the Middle Class is in for a lot of pain.
Indeed, it’s beginning to look like things could come off the rail at any time, especially if Biden gets his way on initiatives like the Green New Deal – under whatever name it is known now – and other attempts at central economic planning that didn’t work in the 70s, didn’t work in the former Soviet Union and won’t work here in America ever. Prosperity initiatives leading to growth like those enacted before the 1982 recession may be the only way out of the mess we’re in. As a senator, Biden voted against most of them when they were before Congress in legislative form. There’s no reason to believe he’ll offer them up now as president but, if he were serious about restoring the health of the U.S economy, he could do a lot by taking off the brakes he’s imposed on the U.S. energy sector. That alone could lift our economic prospects by making essential energy cheaper, creating new opportunities for exports, and millions of new, well-paying jobs. Real growth, real increases in real wages and a reality check to remind everyone the free market works.
Pentagon gives $35 million to subsidize MP Materials's rare earth mineral production
The White House on Tuesday featured a mining company partially owned by a Chinese mining conglomerate at an event dedicated to strengthening the domestic supply chain.
President Joe Biden announced at the event that the Pentagon would award $35 million to the Las Vegas-based MP Materials in an effort to boost U.S. rare mineral production. But MP Materials has arguably allowed China to tighten its grip on the world’s rare earth minerals supply chain. Shenghe Resources Holding, which is partially owned by the Chinese government, owns 8 percent of the company. Shenge spearheaded the deal in 2017 to help MP Materials purchase a mine at Mountain Pass, Calif., out of bankruptcy. The Chinese company is also MP Materials’s largest customer, accounting for nearly all of its $100 million annual revenue.
MP Materials’s links to China have long concerned American officials. The Department of Energy warned its scientists in 2020 not to collaborate with MP Materials executives because of China’s links to the company, Reuters reported.
“Clearly, the MP Materials ownership structure is an issue,” Tom Lograsso, an official with the Department of Energy’s Critical Materials Institute, told Reuters.
The Pentagon award will subsidize MP Materials’s production of heavy rare earth minerals at its mine at Mountain Pass. The minerals are used to produce high-powered magnets used in electric vehicle motors, wind turbines, and defense systems.
James Kennedy, a consultant in the rare earth minerals industry, has raised concerns about other Pentagon grants to MP Materials. Kennedy called Shenghe’s investment in MP Materials a “geopolitical ruse” that helps China maintain a monopoly on the rare earth minerals market.
Those concerns have not deterred the White House. MP Materials chairman James Litinsky spoke at the virtual White House event alongside Biden, Gov. Gavin Newsom (D., Calif.), White House infrastructure czar Mitch Landrieu, and Energy Secretary Jennifer Granholm.
Litinsky said MP Materials was “committed to bringing the supply chain home” to the United States but made no mention of his company’s links to Shenghe Resources Holding. He said MP Materials has partnered with General Motors to produce magnets for 500,000 electric vehicle motors.
It is unclear whether the Pentagon has placed any restrictions on MP Materials’s dealings with Shenghe going forward.
Shenghe’s investment in MP Materials is part of an ambitious plan to stabilize China’s supply of rare earth minerals. The company has also partnered with companies in Greenland and Australia to mine rare minerals, Quartz reported. One goal is to “consolidate the achievements of overseas cooperation projects.”
MP Materials did not respond to a request for comment.
The goal of President Biden’s State of the Union Address Tuesday: reset his presidency after one of the worst inaugural years in American history. Mission unaccomplished.
How bad was 2021? Biden’s omissions in the State of the Union were telling. He didn’t mention last summer’s catastrophic Afghanistan withdrawal. Dr. Anthony Fauci didn’t come up. The phrase “Build Back Better” never crossed Biden’s lips. Instead, he talked about “building a better America”—subtle, I know. Biden focused on Russia’s invasion of Ukraine, his two legislative successes, and a host of proposals that have little chance of passing a closely divided Congress in an election year.
The two major bills he signed into law are no trifle. The $2 trillion American Rescue Plan was a massive expansion of government that many economists believe helped fuel the inflation ripping through America’s economy. The $1 trillion Bipartisan Infrastructure Law was a rare example of both parties reaching a compromise on an issue several presidents have tried to resolve. Importantly, the success of the infrastructure plan undermined legislative support for the $4 trillion Build Back Better law, which Senator Joe Manchin (D., W.Va.) pronounced dead last December.
Not that you could tell Build Back Better is dead from Biden’s speech. He repeated the same proposals he’s been talking about all year, without the “Build Back Better” branding. Biden’s plan is no more likely to pass this year than last. This lengthy portion of his speech was directed to his Democratic base. Stands to reason. It’s all he has left.
That base won’t be enough to salvage Biden’s dismal job approval rating, however. Nor will it rescue the Democrats from the shellacking awaiting them in November. With the exception of masks and returning federal workers to office buildings, Biden gave no sign of changing course on his liberal agenda.
Russia’s invasion of Ukraine is a historical turning point. The moment demands a serious reevaluation of current energy policy, of defense spending levels, of strategic weaponry and arms control. Biden gave no indication that he is ready to engage in such thinking. But he gave every sign that his biggest worry is losing more soft-Democratic voters who dislike his style of leadership and are unhappy at inflation and the direction of the country.
More evidence that Biden is aware of his predicament was his mention of the crisis at the southern border. “We need to secure the border and fix the immigration system,” Biden said to a bipartisan round of applause. Then he went on to outline policies that will do little to stop the flow of illegal immigration and an immigration reform that won’t pass Congress during his term.
The entire speech had this dream-like quality: Biden outlined an agenda that a popular president with substantial majorities in Congress would have a hard time passing into law, while Biden is an unpopular president with the narrowest congressional majorities in a century. He began and ended with gestures toward national unity, by invoking Ukraine and the danger of Russia at the outset and ending with calls to address the opiate crisis and help veterans. The bulk of the speech was a Democratic wishlist divorced from political and electoral reality.
If Biden wants to turn his presidency around, conditions in the country and the world need to change. For that to happen, though, Biden must reorient his agenda. The State of the Union demonstrated that Biden has no interest in doing so. Maybe November will change his mind.
America needs energy independence and a much larger military to deter Putin
Ever since last year, when Vladimir Putin began preparing for an invasion of Ukraine, President Biden has tried to deter him. Biden tried to reason with the Russian autocrat. He released declassified intelligence to rally the world against the imminent threat. He supported French president Emmanuel Macron’s last-ditch attempt at diplomacy. He warned Russia that a war would be met with harsh economic sanctions.
Nothing worked. Negotiations failed. So-called “deterrence through disclosure” had no effect. The threat of punishment carried no weight. The invasion began in the early hours of February 24. The largest military action undertaken on the continent of Europe since World War II is underway. Anyone who pretends to know what will happen next is kidding themselves.
President Biden and America’s allies in Europe have prepared a program of sanctions to punish Putin, his inner circle, and the Russian security and military services for this unprovoked assault on an independent nation of some 40 million people. Biden is right to do so. Free societies have an obligation to demonstrate their revulsion toward despotism. Any cost imposed on Putin is worthwhile.
Yet sanctions aren’t enough. The record is clear: Sanctions make a point, but they rarely achieve their goals. The American president can no longer pretend that economic coercion alone will do the trick. A grand strategy is required to make Putin’s invasion and possible occupation of Ukraine as painful for him as possible, to stop him from expanding the war, and to reestablish deterrence.
America’s economic, military, technological, and cultural power must be aligned toward shielding democracy in Europe and undermining the Russian war machine. Limiting ourselves to sanctions and diplomacy won’t make Putin think twice before demanding more of the West. Quite the opposite: He will brush his shoulder off. He will look for another target.
The first task is to assist Ukraine in its existential conflict. The flip side of sanctioning Russia ought to be providing additional financial aid to the elected government of Ukraine. Weapons should follow the money.
The president can declare that America will not recognize, nor will international organizations seat, a Russian-backed Ukrainian regime. He can prepare to support a Ukrainian government in exile and to supply anti-Russian partisans in occupied territory. Abandoning Ukraine to fight unassisted would be worse than a betrayal. It would make Putin’s life easier. It would enhance his personal rule. That is exactly what we do not want.
Second, Biden must abandon his energy strategy. Nothing less than a total reversal of his approach is necessary. Certain times require a reevaluation of priorities and a reorganization of values. The global crisis that Putin has set in motion is such a moment.
Putin tends to lash out when gas prices are high. Lowering these costs will not be easy. It will take time. And the only effective means of lowering the price of energy is increasing its supply.
Biden must embrace oil and gas exploration. America was energy independent just a few years ago. The American president must do everything he can to make us independent again. While he’s at it, he needs to blanket Europe with liquid natural gas (LNG) facilities, call on the German government to reevaluate its attitude toward nuclear power, and ask the U.S. Congress to subsidize new nuclear plants here at home.
Soliciting OPEC is a crutch. The green-energy transition must wait. Turn on the spigot of American oil and gas to drown out Putin’s energy weapon. Failure to do so would be another self-inflicted wound.
Third, Biden needs to ask Congress not only to pass the authorized defense budget, but to send him an emergency supplemental appropriations bill that dramatically ramps up military spending. Biden’s idea that he could minimize the role of the Defense Department and conduct foreign policy through the State Department and—God help us—John Kerry was always delusional. Now it’s dangerous.
Congress authorized, but hasn’t passed, a defense budget greater than the one Biden requested. Even this increase, however, amounts to a net cut thanks to inflation. America needs to spend more on defense—much more. This additional spending ought to include enhanced research and development as well as updating and expanding America’s nuclear arsenal.
America needs more of everything—more troops, more tanks, more planes, more ships, more drones, more UAVs and USVs, more ABM systems, more chips, and more connectivity. And we need it soon. Ronald Reagan grabbed the Kremlin’s attention with his defense budgets. Biden has not. He needs to mimic Reagan, not Barack Obama, if he wants to stop his presidency from sliding entirely into chaos.
Finally, Biden has an opportunity to reassert himself as leader of the Free World. Biden has sounded the right notes on democracy, but his actions have not supported his rhetoric. He is responsible for the extinction of democracy in Afghanistan. He could not stop Putin from attacking Ukraine. If he does not change his approach, he probably will watch China take Taiwan before his term is over.
Supplementing economic sanctions against Russia with military aid to Ukraine, a liberalized energy policy, and massive defense spending will help anchor Biden amid the authoritarian riptide. To press forward, however, he needs to make a robust case for democracy in multiple venues. He needs to rush reinforcements to NATO members such as Poland and Romania, the Baltic States, and Croatia, Albania, and Montenegro. And he needs to live up to his rhetoric of national unity by nominating a Supreme Court justice who will attract GOP votes and inviting national security officials who have worked for Republicans to join his team.
One of the reasons that the West misjudged Putin was our minimization of ideology in world affairs. We tend to believe that everyone is, in the end, like us—they think like us, they want the same things as us. But we are wrong. Putin and Xi Jinping have different belief systems, different values. And these divergent ideas motivate them to pursue horrific ends.
Every American president has a responsibility to stand for, speak for, and support the values of political and religious liberty at the heart of our experiment in self-government. The most recent occupants of the Oval Office have not quite lived up to the job. The egregious acts of Vladimir Putin offer President Biden a chance to turn things around. Pray that he seizes this opportunity.
The Surface Transportation Board needs to avoid adding new inefficiencies to supply chains by rejecting a cumbersome proposed regulation on freight railroads.
Reciprocal switching already occurs based on private agreements between railroads. But Democrats, first under Obama and now under Biden, have wanted to give the government more power to determine switching agreements in the name of promoting competition. (For a more in-depth discussion of the regulatory history and effects of mandated reciprocal switching, see my piece from January here.)
February 14 was the deadline for organizations to provide written comments before the STB hearing. The last time organizations were asked to comment, in 2016, a wide array of interests that don’t usually agree came together to oppose the STB regulation. This time, it’s the same story. The STB should listen to the disparate voices speaking out against this regulation and abandon it.
The Association of American Railroads (AAR), in a massive 611-page filing, provides evidence that freight-rail rates have not seen significant increases in the past few decades, which undermines shippers’ claims that the industry has been behaving monopolistically. To understand why reciprocal switching is such a big deal for railroads, it’s helpful to watch this video from AAR that shows how a switch actually works. It sounds relatively simple in the abstract — just switch cars from one railroad to another — but the video demonstrates that a typical switch of one car between two railroads can take six days and involve eight trains, three rail yards, and 68 separate rail operations. That process should only be undertaken when it makes economic sense, AAR argues, not when government bureaucrats decide it would promote some other goal.
Economic analysis from a wide variety of groups concludes that mandated reciprocal switching would not be helpful. The International Center for Law and Economics writes in its filing that “the regulatory solutions the STB offers are in search of competition problems, evidence of which remains conspicuously absent.” The center’s filing argues that market interventions, while sometimes necessary, need to be backed up with evidence, and the STB has not done the necessary work to demonstrate a particularized economic problem in need of solving.
Mark Jamison, a professor at the University of Florida and a fellow with the American Enterprise Institute, draws parallels between the STB’s proposed rule and regulations in the telecommunications industry that were adopted under similar pretexts. His filing provides evidence that purportedly pro-competition regulations in telecommunications “generally slowed innovation and led network providers to compete less and invest less.” Those are questions of actual history, not economic theory, and he argues we have no reason to believe the same principles applied to railroads will turn out any better.
Reason Foundation’s filing points out that the STB’s economic analysis is largely based on a study that was released in 2010 based on data from 2008. “The U.S. railroad industry of 2022 looks quite different than the industry of 2008,” Reason’s Marc Scribner writes. “Most strikingly, the sharp decline of coal-fired electricity generation has led coal-by-rail tonnage to decline by nearly half since 2008.” Basing a regulation on data that old is not sound policy-making, regardless of the contents of the rule. Scribner isn’t impressed by the contents either, writing that the STB fails to adequately consider how the rule will affect railroads’ ability to compete with trucking.
The Progressive Policy Institute argues in its filing that “a 2016-vintage regulatory approach is totally wrong for the 2022 economy.” The institute’s chief economist, Michael Mandel, writes that the consequences of supply-chain disruptions we see today demonstrate the importance of prioritizing efficiency in the future. He argues that under the proposed rule, “railroads would have to give a high priority to moving goods in a way that met the reciprocal switching requirements, rather than lowering costs and speeding goods to their ultimate consumers.” The higher costs that would result would then be passed on to consumers, needlessly reducing purchasing power and possibly contributing to inflation.All Our Opinion in Your Inbox
That’s why the American Consumer Institute (ACI) opposes the regulation as well. ACI’s filing argues in strong terms that the proposed rule “would destroy the billions of dollars of annual consumer benefits” that have come since deregulation. ACI’s research found “no empirical evidence of a market failure to justify the calls [for mandated reciprocal switching] by shipping industry lobbyists, whose companies are collectively more profitable than the rail carriers they seek to subjugate.” Small businesses have also been beneficiaries of self-sustaining, deregulated railroads, and the Small Business and Entrepreneurship Council registered its opposition to the proposed rule on similar grounds.
The Intermodal Association of North America (IANA) believes that the proposed regulation in its current form would worsen supply-chain difficulties. Its filing says that the STB’s proposed rule would result in “a decline in rail infrastructure; decreased network velocity; a deterioration in domestic intermodal service; and an adverse impact on intermodal’s ability to compete with over-the-road trucking.” The IANA’s membership includes railroads, but also motor carriers, water carriers, port authorities, and logistics companies — all of whom believe that supply chains as a whole will be made worse because of the regulatory burden imposed on freight rail.
It’s not only the major Class I freight railroads that oppose mandated reciprocal switching. The American Short Line and Regional Railroad Association opposes it, too, saying in its filing that “while short lines often consider themselves ‘shipper representatives’ and we certainly have our share of frustrations with our Class I railroad partners, we see this rule as counterproductive and likely to cause more harm than good.”
Echoing Amtrak’s concerns from 2016, Chicago’s commuter-rail system, Metra, warned the STB that mandated reciprocal switching could cause more traffic delays in the Windy City’s dense railway network.
Aside from economic and operational concerns, there are also safety concerns. Patrick McLaughlin of the Mercatus Center is a former economist with the Federal Railroad Administration, the industry’s safety regulator. In his filing, he points out that switching is an inherently dangerous operation, and mandating more switching for no economic reason needlessly puts workers at risk of injury.
Rail workers aren’t too excited about reciprocal switching, either. SMART-TD, the largest railroad union in North America, opposes the rule for its effects on railroad safety and finances. It doesn’t help workers for railroads to make less money, and the union is concerned that its members could be laid off or face pay cuts if the regulation goes into effect. The Brotherhood of Locomotive Engineers and Trainmen is concerned about the effect the regulation would have on collective-bargaining agreements. Unions aren’t concerned about efficiency like other groups are. They’re just looking out for their members, and they still oppose the regulation.
What about environmentalists? The National Wildlife Federation, along with ConservAmerica, C3, and Third Way, wrote a letter to the STB arguing that the railroad industry “currently offers the most environmentally friendly way to move goods over land.” Freight that gets disrupted by new inefficiencies in railroads doesn’t just disappear. It “could shift to more carbon-intensive modes of transportation,” e.g., trucking. Making railroads less efficient is bad for the environment, too.
At this point, you’re probably wondering who on earth supports this thing. The answer: shippers. The dynamic is similar to that of the Ocean Shipping Reform Act, where shippers are trying to capitalize on dissatisfaction with supply chains to get regulatory changes they have wanted for decades. The Rail Customer Coalition’s letter to the STB argues that the regulatory hurdles that shippers currently face to get mandate reciprocal switching are too high and that “reciprocal switching would empower rail customers, including farmers, manufacturers, and energy providers, to choose a carrier that provides the best combination of rates and service.”
There will always be a strained relationship between shippers and carriers. Shippers are always going to want lower rates, and carriers are always going to complain that shippers are making unfair demands. But in this case, the evidence presented to the STB clearly leans in the railroads’ favor. It’s not often in Washington that economic analysis, consumer interests, small-business interests, safety analysis, organized labor, and environmentalism all point in the same direction.
The 3–2 Democratic majority on the STB has a choice. It can side with the evidence from all those groups that normally disagree. Or it can side with shippers and President Biden, as requested in his executive order on competition. If it does the latter, in the face of all the prevailing evidence, it will be adding new inefficiencies to supply chains at the worst possible moment.
Since the global financial crisis, and particularly during the COVID-19 pandemic, fiscal and monetary policymakers have operated as if there are no tradeoffs to their expansionary policy programs. Now that economic conditions have changed, they may soon have to relearn old lessons the hard way.
Smart economic policymaking invariably requires trading off some pain today for greater future gains. But this is a difficult proposition politically, especially in democracies. It is always easier for elected leaders to indulge their constituents immediately, on the hope that the bill will not arrive while they are still in office. Moreover, those who bear the pain caused by a policy are not necessarily those who will gain from it.
That is why today’s more advanced economies created mechanisms that allow them to make hard choices when necessary. Chief among these are independent central banks and mandated limits on budget deficits. Importantly, political parties reached a consensus to establish and back these mechanisms irrespective of their own immediate political priorities. One reason why many emerging markets have swung from crisis to crisis is that they failed to achieve such consensus. But recent history shows that developed economies, too, are becoming less tolerant of pain, perhaps because their own political consensus has eroded.
Financial markets have become volatile once again, owing to fears that the US Federal Reserve will have to tighten its monetary policy significantly to control inflation. But many investors still hope that the Fed will go easy if asset prices start to fall substantially. If the Fed proves them right, it will become that much harder to normalize financial conditions in the future.
Investors’ hope that the Fed will prolong the party is not baseless. In late 1996, Fed Chair Alan Greenspan warned of financial markets’ “irrational exuberance.” But the markets shrugged off the warning and were proved correct. Perhaps chastened by the harsh political reaction to Greenspan’s speech, the Fed did nothing. And when the stock market eventually crashed in 2000, the Fed cut rates, ensuring that the recession was mild.
In a testimony to the congressional Joint Economic Committee the previous year, Greenspan argued that while the Fed could not prevent “the inevitable economic hangover” from an asset-price boom, it could “mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion.” The Fed thus assured traders and bankers that if they collectively gambled on similar assets, it would not limit the upside, but it would limit the downside if their bets turned bad. Subsequent Fed interventions have entrenched such beliefs, making it even harder for the Fed to rein in financial markets with modest moves. And now that much more tightening and consequent pain may be needed, a consensus in favor of it might be harder to achieve.
Fiscal policy is also guilty of peddling supposedly painless economic measures. Most would agree that the pandemic created a need for targeted spending (through extended, generous unemployment benefits, for example) to shield the hardest-hit households. But, in the event, the spending was anything but targeted. The US Congress passed multi-trillion-dollar bills offering something for everyone.
The Paycheck Protection Program (PPP), for example, provided $800 billion in grants (effectively) for small businesses across the board. A new study from MIT’s David Autor and his colleagues estimates that the program helped preserve 2-3 million job-years of employment over 14 months, at a stupendous cost of $170,000-$257,000 per job-year. Worse, only 23-34% of this money went directly to workers who would otherwise have lost their jobs. The balance went to creditors, business owners, and shareholders. All told, an estimated three-quarters of PPP benefits went to the top one-fifth of earners.
Of course, the program may have saved some firms that otherwise would have collapsed. But at what cost? While capitalists anticipate profits, they also sign up for possible failure. Moreover, many small businesses are tiny operations without much organizational capital. If a small bakery had to close, the economic fallout would have been mitigated by the enhanced unemployment insurance. And if it had a loyal clientele, it could restart after the pandemic, perhaps with a little help from a bank.
The standard line is that the unconstrained spending was driven by a sense that unprecedented times called for unprecedented measures. In fact, it was the response to the 2008 global financial crisis that broke the previous consensus for more prudent policies. Lasting public resentment that Wall Street had been helped more than Main Street motivated politicians in both major parties to spend with abandon when the pandemic hit. But targeted unemployment benefits were associated with the Democrats, leaving Republicans seeking wins for their own constituencies. Who better to support than small businesses?
While political fractures were driving up untargeted spending, budget hawks were nowhere to be found: Their voices had been steadily drowned out by economists. In addition to the cranks who show up periodically to advocate ostensibly free lunches through money-financed spending, a growing chorus of mainstream economists had been arguing that prevailing low interest rates gave developed countries significantly more room to expand fiscal deficits. Politicians who were eager to justify their policies ignored these economists’ caveats – that spending had to be sensible, and that interest rates had to stay low. Only the headline message mattered, and anyone suggesting otherwise was dismissed as a hair-shirt fanatic.
Historically, it has been the Fed’s job to take away the monetary punch bowl before the party gets frenzied, and Congress’s job to be prudent about fiscal deficits and debt. But the Fed’s desire to spare the market from pain has driven more risk-taking, and reinforced expectations of further interventions. The Fed’s actions have also added to the pressure on Congress to do its bit for Main Street, which in turn has led to inflation and a belief that the Fed will back off from raising rates.Sign up for our weekly newsletter, PS on Sunday
All of this makes a return to the previous consensus more difficult. When the Fed does raise rates significantly, the government’s costs of servicing the debt from past spending will limit future spending, including on policies to reduce inequality (which has fueled political fragmentation), combat future emergencies, and tackle climate change.1
Every economy has a limited reservoir of policy credibility and resources, which are best used to mitigate genuine economic distress, not to shield those who can bear some pain. If everyone wants a free lunch, the bill eventually will be paid by those least able to afford it. Emerging-market economies have had to learn this the hard way. Developed countries may have to learn it again.
The inflation pot is boiling, and Secretary Yellen has poured gasoline on the fire.
Last week’s announcement that the Federal Reserve is gearing up for a round of tightening in response to runaway inflation raised the question: Where did this inflation mess come from? To some extent, we might stop to blame the word “modern.” That word used to be grand; you would be happy to have a kitchen filled with modern appliances, or to be a modern man. But today, the word has become a weapon wielded by cancel culture’s activists. In economics, the most infamous use of the word is in the creation of “modern monetary theory” (MMT), which suggests that the government can just print money to finance runaway expenditures. There is a strong case to be made that inflation is spinning out of control right now in large part because of MMT.
MMT is to blame for two reasons. First, Democrats embraced MMT at the beginning of the Biden administration and then passed astonishingly large spending increases when the economy was near full employment. This was true at the fringe, where Representative Alexandria Ocasio-Cortez and Senator Bernie Sanders explicitly referenced the theory, but also in the establishment, where Janet Yellen asserted that it was important to “go big” with spending because inflation was easy to control. Second, if markets began to believe that policy-makers truly embraced MMT, they would expect more inflationary policies in the future. This would remove the expectations anchor that has stabilized inflation for decades. (The link between fiscal policy and inflation has been extensively explored by our own John Cochrane here and here.)
As we look ahead to a year of Federal Reserve tightening, the effectiveness of the central bank’s policy will depend both on the interest-rate sensitivity of economic activity and on the Federal Reserve’s ability to restore markets’ faith in the commitment of policy-makers to policies that restore price stability. For that, they need the Biden administration’s help. In other words, if we want to whip inflation now, the Democratic threat of continuing to use MMT as an excuse for runaway spending must be addressed as well, lest expectations be completely unmoored.
Against this backdrop, one would have to classify Treasury Secretary Janet Yellen’s Davos speech as one of the most serious policy threats to the future of our economy launched by a treasury secretary. In it, she introduced the idea of “modern supply-side economics” MSSE — unfortunately for Yellen, this will forever be (appropriately) pronounced “messy.” Indeed, instead of rejecting the word modern to address the expectations crisis, the administration is recklessly spreading it like inflationary fertilizer.
What is “modern” supply-side economics? According to Secretary Yellen it begins with the rejection of traditional Reaganesque supply-side economics that advocates a policy focus on stimulating capital formation through low taxes and deregulation. “Significant tax cuts on capital have not achieved their promised gains,” the secretary said in the speech. “And deregulation has a similarly poor track record.” On this assertion, the treasury secretary is factually challenged. As documented extensively in the 2018 and 2019 Economic Reports of the President, the academic literature decisively supports traditional supply-side economics, as does the evidence after the Trump tax cuts. Secondly, the literature and evidence also strongly support the view that deregulation has large positive economic effects.
Continuing her journey away from the facts, Yellen adds that “this approach has deepened disparities in income and wealth by shifting the burden of taxation away from capital and towards labor,” ignoring the fact that income inequality declined sharply after the Trump tax cuts.
So what’s to replace this “failed” theory? President Biden’s Build Back Better plan, evidently. Yellen argues that the bill, which doubles down on the idea that government spending can “go big,” will deliver economic growth that isn’t “just focused on achieving a high top-line growth number that is unsustainable — we are instead aiming for growth that is inclusive and green.”
Yellen then cites four agenda items that exemplify the “modern” version of the theory. The first is the enormous expansion of child-care expenditures in the BBB plan. This, she argues, will increase the labor supply because parents can go back to work supported by almost free child care. The second is the commitment to large increases in federal spending on training and education — despite the remarkable dearth of evidence that either has a positive effect on productivity. The third is the continued interest in ever more infrastructure spending. This, at least, plausibly has supply-side effects — Arthur Laffer himself never argued against bridges, so this leg of the stool hardly deserves the moniker “modern.” Finally, she argues for a higher corporate-tax burden, ignoring the literature on the negative effects it has on supply and, accordingly, on inflation.
In other words, “modern supply-side economics” is just a “messy” corollary of modern monetary theory. If you want to deliver a strong economy, let the government finance enormous spending with the printing press and high taxes. These policies, of course, will not have the desired effect, but they will run the risk of dramatically increasing inflation expectations — even if they’re not enacted. After all, Democrats may well be able to enact this agenda in the future, and, in the meantime, they will choose the members of the Board of Governors of the Federal Reserve.
Since the days of Alexander Hamilton, it has been the role of the treasury secretary to defend the value of U.S. debt — including, as Secretary Robert Rubin did so effectively, reminding Congress of the risks of runaway spending.
No more. The inflation pot is boiling, and Secretary Yellen has poured gasoline on the fire.
The pandemic has revealed Americans to be tacit Social Darwinists, while trapping the Chinese in a vast Panopticon.
Authoritarian regimes tend to boast about themselves and denigrate their rivals. President Xi Jinping’s China is no exception. “As the Covid-19 epidemic takes away hundreds of lives every day in the U.S.,” wrote Hu Xijin, the former editor-in-chief of the Global Times, on Jan. 14, “that country’s propaganda machinery is engaging in vicious smears against China’s dynamic zero-case policy of epidemic prevention … Think about it. More than 800,000 Americans died from Covid-19 in the U.S. Behind these numbers, how many sad and desperate stories are there?”
“The experience and facts of the past two years,” wrote Guo Yan in the Economic Daily five days later, “have shown that China’s general strategy of ‘foreign defense against imported [cases] and domestic defense against breakouts’ and the general policy of ‘dynamic clearing’ are the Covid prevention policies best suited to China’s own national conditions on top of being beneficial to the world … It is the inaction and chaotic actions of some policy makers that have caused the American people to fall into the epidemic crisis time and time again.”
Might the Chinese be right? As we reach the second anniversary of the Covid pandemic, perhaps the most surprising thing is how many Americans have lost their lives compared to how few have perished in China. How are we to explain this astonishing divergence?
The simple answer is that, despite being the source of the virus that caused the pandemic, the Chinese managed containment very successfully, while the U.S. bungled everything from testing to mask-wearing to quarantining.
Some people go even further, arguing (as does Chinese Communist Party propaganda) that the difference in death tolls illustrates the superiority of China’s political system over America’s corrupt and self-indulgent democracy. However, I have never bought this second argument. And I am no longer satisfied with the first.
We now have a U.S. death toll of between (depending on your source) 860,000 and 883,000 deaths due to Covid, the 20th-highest mortality relative to population globally. Actual mortality is running at 19% above the expected figure (compared with 5% in Canada). We are heading for a million deaths by May. According to the Economist, we may already be there.
True, in relative terms — deaths per million — U.S. mortality is not the worst in the world (it ranks 19th). In terms of excess mortality, too, the U.S. has fared better than a number of Latin American and Eastern European countries. The puzzle remains that on paper — according to the Global Health Index published in 2019 — the U.S. was better prepared for a pandemic than any other country.
Even more remarkable is how few Chinese the new coronavirus has killed: Fewer than 5,000, meaning a death rate three orders of magnitude smaller than the U.S. rate. Considering that the pandemic originated in Wuhan, this is an astonishing achievement. Of course, skepticism is always warranted where Chinese statistics are concerned. But even the Economist’s estimates, which suggest that there may have been significantly higher excess mortality in China, point to a far lower relative death toll than in the U.S.
Two things explain the remarkably high mortality the U.S. has suffered in this pandemic. First, the American public health bureaucracy failed utterly. Initially, when we knew very little except that it was contagious and dangerous, the relevant agencies were staggeringly complacent when they should have been frantically testing, tracing and isolating.Sponsored ContentWhy Decisions Made Now Will Steer the Net Zero TrajectoryUBS
Then, in March 2020, the official mind flipped from complacency to panic, partly on the basis of a paper by the British epidemiologist Neil Ferguson (no relation), who argued that we had to lock people in their homes until vaccines were available or 2.2 million Americans would die.
As it became clear that this approach would wreck the global economy, the public health officials resorted to improvisation, alternately tightening and loosening restrictions on economic and social life in a reactive and mostly ineffective way. Masks were at first dismissed as unnecessary, then became mandatory even in some outdoor locations, where they served no purpose.
When some skeptical scientists challenged the wisdom of lockdowns, the public health establishment was dismissive. The Great Barrington Declaration, published in October 2020 by Harvard’s Martin Kulldorff, Oxford’s Sunetra Gupta and Stanford’s Jay Bhattacharya, offered a persuasive critique of blanket pandemic lockdowns, arguing instead for “focused protection” of vulnerable groups such as the elderly or those with medical conditions.
“This proposal from the three fringe epidemiologists … seems to be getting a lot of attention,” Francis Collins, head of the National Institutes of Health, emailed Anthony Fauci, head of the National Institute of Allergies and Infectious Diseases. “There needs to be a quick and devastating published take down of its premises … Is it underway?”
Now that we have vaccines with high efficacy and a variant that causes mild flu-like symptoms in most vaccinated people, the official mind remains wedded to its playbook — in the parts of the U.S. where most people are vaccinated, such as northern California, where I live. Educational institutions have reverted to remote learning (an oxymoron, as everyone knows); masks are ubiquitous, even outdoors; a host of petty regulations persist.
Meanwhile, in the states with significant numbers of unvaccinated and vulnerable people, almost no precautions are taken. Consequently, the intensive care units are filling up once again. I make this the fifth wave of Covid in the U.S., and already mortality relative to population is higher than in South Africa, Denmark and the U.K., where the omicron variant struck sooner.
Yet there is a second reason for the relatively high American mortality during the pandemic, which has to do with public attitudes and behavior. I have come to the conclusion, after observing my fellow Americans for two years that — whatever our public health officials may tell us, and whatever some of us may say — in practice and in aggregate we are a nation of Social Darwinists.
Social Darwinism is a contentious term, I know, but its history is illuminating. A century ago, the ideas that came to be summed up as Social Darwinism by historians such as Richard Hofstadter were not limited to a far-right lunatic fringe. They derived from the writings of some of the era’s pre-eminent proponents of social progress.
Herbert Spencer (1820–1903) was the English philosopher who did most to import ideas derived from Charles Darwin and other evolutionary theorists (notably Jean-Baptiste Lamarck) into the study of contemporary human societies. In works such as “First Principles” (1862), “Principles of Biology” (1864) and “The Man Versus the State” (1884), Spencer sought to discern universal laws of evolution.
One of his key contentions was that most social interventions by government were harmful, no matter how well-intentioned, because they interfered with the natural laws of evolution, which were the main driver of progress.
Some Social Darwinists went even further, arguing that infectious disease had a role to play in promoting the survival of the fittest. Franz Ignaz Pruner, a German physician, anthropologist and racial theorist, wrote “The Global Cholera Pandemic and Nature’s Police” (1851), based partly on his observations in Egypt. Wherever Europeans and Americans established colonies in the tropics, officials would periodically muse that the terrifyingly high mortality rates arising from disease — and of course from poor sanitation and malnutrition — must, like famines in India, be part of some providential design.
It was a relatively short step from Social Darwinism to eugenics — the theory popularized by Francis Galton, Karl Pearson and others that government should actively promote the reproduction of the “fit” and limit the reproduction of the “unfit.”
It is easy to forget today how influential such notions were a century ago, when they appealed almost as much to progressives as to proto-fascists. Chicago sociologist and reformer Charles Henderson opposed immigration of the “unfit,” proposed that the “feebleminded and degenerate” be banished to rural labor colonies and sterilized to “prevent their propagation of defects and thus the perpetuation of their misery in their offspring.”
As Spencer had made clear, it was a guiding principle of Social Darwinism that public-health legislation “defeats its own end” and “favours the multiplication of those worst fitted for existence, and, by consequence, hinders the multiplication of those best fitted for existence.”
In “Social Statics,” he used language echoed today by American libertarians:
If … it is the duty of the state to protect the health of its subjects, it is its duty to see that all the conditions of health are fulfilled by them. Shall this duty be consistently discharged? If so, the legislature must enact a national dietary: prescribe so many meals a day for each individual; fix the quantities and qualities of food, both for men and women; state the proportion of fluids, when to be taken, and of what kind; specify the amount of exercise, and define its character; describe the clothing to be employed … and to enforce these regulations it must employ a sufficiency of duly-qualified officials, empowered to direct every one’s domestic arrangements.
Like many of today’s critics of the public-health agencies, Spencer argued that the medical profession and bureaucrats were actuated by self-interest rather than altruism and had an “unmistakable wish to establish an organized, tax-supported class, charged with the health of men’s bodies, as the clergy are charged with the health of their souls.”
Reading “Social Statics” today, you see how completely Spencer lost the argument. As we enter the third year of the Covid pandemic, the public-health clergy have established themselves in precisely the kind of well-paid positions of power that Spencer foresaw, leaving a motley array of lockdown skeptics and anti-vaxxers to rehash his old arguments.
I have tended to steer clear of the lockdown skeptics and to heap opprobrium on the anti-vaxxers. But what we really see in both cases is a kind of revival of Social Darwinism that extends beyond the militant opponents of lockdowns and vaccines to include the many millions of Americans who over the past two years have simply flouted the pandemic rules. Ignoring the prescriptions of an intrusive nanny state, or complying with them so carelessly as to render them ineffective, they have tacitly given free rein to the principle of the survival of the fittest.
Compared with Western Europeans and especially with East Asians, Americans have a remarkably high tolerance of excess mortality, especially when it is heavily concentrated in politically underrepresented social groups. The same is true with respect to the relatively high death toll from firearms that Americans tolerate, not forgetting the staggering mortality caused by opioid overdoses in the past decade, which has no parallel in any developed country.
Now contrast the American experience of the pandemic with the Chinese. If Americans resemble modern-day Social Darwinists, the People’s Republic is a utilitarian Panopticon worthy of the English philosopher Jeremy Bentham’s idealized penitentiary of the late-18th century, which relied on prisoners’ uncertainty about whether they were under observation to incentivize good behavior.
No country has more effectively used non-pharmaceutical restrictions on social and economic life to control the spread of SARS-CoV-2 than China. True, these restrictions were widely imitated, as in New Zealand. But the reason they were more effective in China than elsewhere is precisely that the Communist Party’s system of surveillance creates what Bentham called “the sentiment of a sort of invisible omnipresence.”
And yet there turns out to be a catch, in the form of a new and much more infectious variant of the virus. In omicron, Xi Jinping’s Panopticon faces a new and ghastly challenge. Not only does the Chinese population have essentially no natural immunity from previous infections, thanks to the Zero-Covid strategy; the inferior Chinese-made vaccines also offer little protection against omicron. As a consequence, China must impose tighter restrictions than ever before.
Currently, over 20 million people are under some form of lockdown in half a dozen cities, notably Xian and Tianjin, because small numbers of people tested positive. Traditional Lunar New Year celebrations are being restricted. The Beijing Winter Olympics will take place with almost no foreign spectators. The volume of international flights to China has been reduced by more than 90%.
In some ways, China’s reversion to being a closed society is of a piece with Xi’s attempt to revive other aspects of Maoism: his reassertion of the Communist Party’s dominance over the private sector, his call for more egalitarian social outcomes, his intolerance of domestic dissent and ethnic minorities, his readiness to threaten war. But it is not at all clear how any of this helps the Chinese economy grow sufficiently fast to overtake that of the U.S.
By contrast, the American propensity to ignore (or at least honor mainly in the breach) the bureaucracy’s rules and regulations — combined with the opening of the fiscal and monetary floodgates — has meant that paradoxically, the public health disaster of the pandemic has been accompanied by an economic recovery so red-hot that U.S. inflation has jumped to a rate not seen since 1982.
In the eyes of today’s Western public health experts, none of this makes sense. Neil Ferguson gave an interview last year in which he described how he and his fellow scientific advisors to the British government realized that they might be able to copy the Chinese strategy for containing Covid. “People’s sense of what is possible in terms of control changed quite dramatically between January and March ,” he recalled. “They [i.e., the Chinese] claimed to have flattened the curve. I was sceptical at first. … But as the data accrued it became clear it was an effective policy.”
The question was: Could the West copy China’s lockdown? “It’s a communist one-party state, we said. We couldn’t get away with it in Europe, we thought,” said Ferguson. “And then Italy did it. And we realized we could.”
It continues to puzzle me that so many smart people were convinced that the People’s Republic of China should be the role model for a free society faced with a pandemic (as opposed to the East Asian democracies like South Korea and Taiwan that have contained the virus with minimal lockdowns). But that was the road we attempted to go down, inflicting immense economic disruption until we realized that it was unsustainable — that not even Ferguson (or, it turns out, the government he was advising) could adhere to a system of universal house arrest, much less don’t-tread-on-me Americans.
In the U.S. today, Covid has become as much a bureaucratic as a medical condition. Having had omicron in December, I and my family remain subject to a plethora of rules that make absolutely no sense, as we can neither catch nor transmit the virus again so soon after having been infected. I pointlessly wear a mask at meetings and on planes. I pointlessly submit to regular Covid tests. I pointlessly fill out online forms attesting to my children’s health.
Perhaps at some point this year a new variant — Pi, Rho, Sigma, take your pick — will emerge that I can catch and that will give me and others something more than a mild cold. But until that time comes, I shall feel a sense of individualist resentment — that I now realize is very American — about the whole dysfunctional edifice of rules and regulations. When (if?) they are finally swept away, I shall rejoice.
And, if the Chinese Panopticon finally loses control of Chinese virus in this, the third plague year, I’ll recall that, in the history of struggles between rival empires, the fitness that determines survival is seldom correlated with a state’s power over the individual — or its propensity to boast.
The Federal Reserve signaled Wednesday that it will likely raise interest rates in March as part of a monetary policy shift to temper an over-heating economy and soaring inflation.
With inflation far exceeding the central bank’s 2 percent target, the Fed plans to increase the cost of borrowing to slow down economic activity, which will hopefully moderate the price surges across commodities and commercial sectors. Prices are increasing at the fastest pace in almost four decades, with 7 percent annual inflation in December. A supply-chain crisis marked by prolonged shipping delays and production bottlenecks is still ongoing and exacerbating inflationary pressures.
Powell also said that the Fed will start to unload its massive balance sheet by tapering off its large-scale purchases of bonds and other assets, a program which the Fed has sustained for many years and which has injected enormous monetary stimulus into the economy. The Fed currently maintains a portfolio of over $8 trillion worth of U.S. government bonds and mortgage-backed securities (MBS).All Our Opinion in Your Inbox
NR Daily is delivered right to you every afternoon. No charge.
He said that inflation “has not gotten better. It has probably gotten a bit worse. . . . To the extent that situation deteriorates further, our policy will have to reflect that,” Reuters reported. “This is going to be a year in which we move steadily away from the very highly accommodative monetary policy we put in place to deal with the economic effects of the pandemic.”
However, Powell still kept a sense of optimism that the inflation so many consumers are feeling at the gas pump and across a diverse range of products will have an expiration date, possibly in the near term. “Like most forecasters we continue to expect inflation to decline over the course of the year,” Powell said Wednesday.
The stock market tumbled in response to Powell’s monetary tightening announcement. Low-interest policies often have the effect of fueling financial market booms, which is why warnings of rate hikes rarely bode well for them.