It costs more to pay rent each month and to fill up a tank of gas every week and to put food on the table every day.
So, at a moment when the dollar doesn’t go as far as it once did, should Americans worry that injecting another $1.85 trillion into the economy might increase inflation?
No, Jen Psaki told Peter Alexander this week.
And why not?
Well, the White House press secretary explained to the NBC News correspondent, “because no economist out there is projecting that this will have a negative impact on inflation.”
Of course, that isn’t true.
There are many economists out there and some of them do warn that the Build Back Better plan will further increase the prices that dog consumers and can doom the careers of politicians. But the existence of economists with views contrary to those held by the president’s National Economic Council isn’t entirely the point. At issue more broadly is the fulfillment of something Joe Biden said back in April 2020.
“Milton Friedman,” he said as a candidate, “isn’t running the show anymore.” And nothing could be truer now that Biden is the president.
As the first year of his administration nears completion, inflation has emerged as an unwelcome accompaniment. It has not hit the double-digit levels that propelled Friedman, the late Nobel Prize laureate who warned about the dangers of an unchecked money supply, to prominence in the late 1970s. But consumer prices jumped 6.2%, years over year, in October, the biggest such increase in three decades.
“There's no doubt inflation is high right now. It's affecting Americans' pocketbooks. It's affecting their outlook,” Brian Deese, director of the National Economic Council, told Chuck Todd on NBC’s “Meet the Press” Sunday.
“But it's important that we put this in context. When the president took office, we were facing an all-out economic crisis.”
The White House argues that those inflation numbers are transitory and will eventually come down. The temporary pain that consumers feel, they contend, is the result of pent-up demand and kinks in the supply chain, not because of excesses in government spending. Two of the president’s other economic advisers, Jared Bernstein and Ernie Tedeschi, dismissed early inflation warnings and predicted that price increases “should fade over time as the economy recovers from the pandemic.” That was in April.
But lingering inflation hasn’t lessened the administration's appetite for spending— witness the $1.2 trillion infrastructure plan signed into law this week or the $1.85 Build Back Better plan that’s still pending in Congress. The White House has shooed away concerns in recent weeks by pointing to a letter from 17 Nobel laureates who predict that the spending “will ease longer-term inflationary pressures” and to analysis by Moody’s Investor Services that reached the same conclusion.
“They're all wrong,” said Steven Hanke, a professor of applied economics at Johns Hopkins University. He doesn’t deny that supply chains are backed up or that there may be pent-up demand. But Hanke told RealClearPolitics that those are “ad hoc excuses.”
Inflation is being driven by “the money supply which has increased by over 35% since COVID, an unprecedented explosion since World War II.”
Along with John Greenwood, chief economist at the investment management company Invesco in London, Hanke likens the situation to a bathtub with three drains. The first two drains are economic growth and savings. In the absence of inflation, money that flows into the tub easily flows out of the tub through those two drains.
“But if more money is flowing in than out,” the two reasoned in a recent Wall Street Journal op-ed, “the level of money rises. It will eventually reach the overflow, which is the inflation drain.”
An alumnus of the Reagan administration and a fervent supply-sider, Hanke notes that between December 2019 and August 2021, the supply of dollars in circulation grew by $5.5 trillion, “a stunning 35.7% increase in only a year-and-a-half, driven primarily by the Federal Reserve’s purchase of Treasury and mortgage-backed securities.”
Enter Biden and his human-infrastructure package.
In Detroit on Wednesday, the president argued that his plan “is fully paid for” and does not increase the deficit “one single cent.” The spending plan would be paid for by new taxes on top earners who make more than $400,000, the administration insists. That might be true, if the bill that reaches Biden’s desk includes those tax increases, an unpopular possibility currently being debated in Congress. But that’s a big if: Sen. Joe Manchin, a linchpin for passage in the upper chamber, has repeatedly expressed his concerns.
There are other snags.
As the New York Times reports, the head of the Congressional Budget Office warned Monday that cracking down on tax evaders would produce about $120 billion, not the $400 billion Biden is relying on to cover some of the spending. While a full formal analysis is still expected, Hanke and others argue that deficit spending “makes the Fed’s job a lot more difficult” because when the Treasury Department issues new bonds to cover that debt, “what are they going to do? Say, ‘Oh, no — we’re not going to buy anymore.’ They are buying those bonds. That's why the balance sheet of the Fed gets bigger and bigger. And that's why the money supply gets bigger and bigger.”
The notion that increased government spending doesn’t carry the risk of inflation, said Michael Jay Boskin, an economics professor at Stanford University's Hoover Institution, “is economically illiterate.” Increased government spending adds to the total demand for goods and services, he added, “such that we are risking inflation, and the Biden administration seems to be trying divert attention. There is a risk that inflation may become entrenched. It's hard to imagine a worse outcome than an inflation spiral.”
Chairman of the president’s Council of Economic Advisers from 1989 to 1993, Boskin notes that “a very large fraction” of the relief payments the federal government sent out in 2020 and 2021 was either saved or has yet to be spent. “That is a lot of government spending floating around the system now in the pockets of consumers and the budgets of state and local governments,” waiting to further flood the economy.
On the question of inflation, illustrations of the concept abound. A flood of dollars chasing too few goods. The monetary supply as an overflowing bathtub. But anti-tax conservative Stephen Moore prefers a more colorful one: “dumping gasoline on a forest fire.” A member of former President Trump’s economic task force, Moore questions the Biden administration’s explanation for inflation, specifically the idea that the problem is pent up demand post-pandemic. “Because if that’s the case, why did we spend $2 trillion earlier this year,” he said of the American Rescue Plan. “It doesn’t make any sense.”
The White House likely won’t heed his warnings or those of any naysayers. Analysis from Reagan and Bush alumni — let alone Trump advisers — certainly isn’t in fashion in this administration, especially since, as Biden noted more than a year ago, Milton Friedman “isn’t running the show anymore.”