Inflation continues to rage throughout the economy. Earlier this month, the consumer price index, an estimate by the Bureau of Labor Statistics of the change in costs consumers pay for goods and services, rose 8.6% year over year in May. Meanwhile, the producer price index, the change in prices received by domestic producers for their outputs, increased by 10.6%. The latter number suggests that inflation is accelerating, not decelerating, as sooner or later, these costs will have to be passed on to the consumer. And, of course, the most notable metric of inflation is the cost of gasoline, now above $5 per gallon and certain to go higher as the summer driving season kicks into high gear.
untitledThe problem is so serious that last week, the Federal Reserve raised its benchmark interest rate by 75 basis points, the largest hike in nearly 30 years. The Fed also indicated it now plans to hike rates more than previously expected. These rate hikes make it more expensive for banks to borrow, a cost that will be passed on to consumers, making it harder for them to acquire money and thus reducing the number of dollars chasing goods in the economy.
It’s a dangerous game the Fed is playing, though they have no other choice. The goal is to raise rates just enough to tame inflation but not so much that a lack of credit forces the economy into a recession. The last time the United States faced inflation levels of this level was in the early 1980s, and the Fed’s aggressive moves promoted the nasty recession of 1982-83.
That’s what Fed Chairman Jerome Powell is up to. What about President Joe Biden? What is his plan to combat inflation?
Nothing. He has no plan.
Well, to be clear, he has no substantive plan. He has an elaborate messaging plan intended to make you think he’s done all he can and that none of this is his fault. He’s blaming “Putin’s price hike,” as if inflation magically began when Russia invaded Ukraine. He’s also blaming the oil industry for price-gouging. And if that isn’t enough, he’s yelling a lot. “I don’t want to hear any more of these lies about reckless spending. We’re changing people’s lives,” he literally shouted at the AFL-CIO meeting in Philadelphia last week. One of those liars presumably was Larry Summers, the treasury secretary under Bill Clinton and economic adviser to Barack Obama, who warned last year that Biden’s “American Rescue Plan” ran the risk of generating inflation.
Beyond this, Biden, who promised during the 2020 campaign that the buck would stop with him, really wants you to know that this is completely and totally not his fault. If anything, per Biden, deficit spending is way down from last year, so isn’t that enough, already?
This is all just mere spin. Take Biden’s claims about the deficit. Yes, it’s down. But it has nothing to do with his administration’s fiscal restraint. Instead, as Jim Capretta of the American Enterprise Institute has noted, this year saw record tax revenues as the pandemic eased, as well as a tailing off of one-time pandemic-related stimulus from the government.
Likewise, Biden’s assertion that handling inflation is the job of the Fed is only partially true. Inflation can be dealt with on the monetary side, via interest rates. It can also be handled on the fiscal side, via government spending. After all, inflation is the problem of too much money demanding too few goods and services, and the government is a major purchaser of goods and services. Decreasing federal spending, or at least lowering the rate of spending increases, would be one solution to the problem.
But Biden won’t have any of that. Per Capretta, his fiscal year 2023 budget increases domestic discretionary spending by 11%. If you believe Summers, one reason we have inflation at these levels today is because of Biden and the Democratic Party’s massive spending at the start of 2021. And until West Virginia Sen. Joe Manchin broke off negotiations, the Biden White House was still trying to get its “Build Back Better” plan passed into law, which would have amounted to another major expansion in government activity. Amazingly, the White House claimed that this would help lower inflation.
Realistically speaking, this White House will never breathe a word about spending cuts. Democrats in Congress will have nothing to do with any such notion, and the slightest hint of such an idea from 1600 Pennsylvania Ave. would prompt a backlash from progressives. Better to rail against the oil companies and suggest Summers is a liar.
This marks a fascinating change in the leftward shift of the Democratic Party. The last Democratic president to serve during a period of high inflation was Jimmy Carter. Thanks to his post-presidential legacy, Carter has successfully reinvented himself as something of a progressive, but his record in office was quite different. He ran in 1976 as a centrist alternative to the leftward lurch the Democrats undertook in 1972, when they nominated progressive darling George McGovern. And he usually tried to govern that way.
When inflation reared its ugly head in the late 1970s, Carter took the problem seriously. His FY 1979 budget was modest in its ambitions and rejected the recommendations of his Department of Housing and Urban Development for a big round of spending on urban renewal. Carter also fought tooth and nail to keep postal workers from getting a raise beyond government guidelines. He tried to change procurement policies to limit wage increases given by government contractors. He likewise opposed efforts by Massachusetts Sen. Ted Kennedy to expand government support of medical services, arguing it would have an inflationary effect. And most significantly, it was Carter who named Paul Volcker chairman of the Federal Reserve Board. Volcker’s hawkish monetary policy in the early ’80s was what finally broke the inflationary cycles that had plagued the economy in the ’70s.
The only thing Carter got for his commitment to fiscal discipline was a political headache. The various client groups of the Democratic Party — organized labor, big city mayors, and others — publicly denounced the president in strident terms at multiple points. And Kennedy himself ran in 1980. Carter enjoyed a temporary advantage in his primary battle against Kennedy thanks to the Iran hostage crisis, which prompted a rally-around-the-flag bump in his job approval numbers. But as the crisis continued, the bounce faded, Kennedy won the New York primary with almost 60% of the vote, and he took the fight all the way to the convention in New York City.
Carter had the backing of the delegates to win, but, as the actions of the Biden administration illustrate, the future of the Democratic Party belonged to Kennedy and the progressives. Democrats in Congress and activists across the country simply will not tolerate any hint of government belt-tightening. And Biden, never having been a darling of the Left, knows well enough to leave it be, lest he risk his political standing within his own coalition. The only Democrat who still sounds at all like Carter is Manchin, who not coincidentally is a throwback to the Democratic Party of old.
The conventional wisdom among legacy media and academics is that polarization is mainly a function of the Republican Party tacking hard to the Right since the 1970s. But that is just not true. Compare Biden to Carter on inflation. The latter made honest efforts to bring inflation to heel, while the former offers nothing but sound and fury. The difference gets down to who is really in charge in the Democratic Party these days. It’s the progressive Left, plain and simple.
So don’t expect the Biden administration to do anything about inflation — beyond claiming falsely there’s nothing more to be done.
Jay Cost is a visiting fellow at the American Enterprise Institute and a visiting scholar at Grove City College.
