Sen. Elizabeth Warren (D-MA) is not an economist, so when she does try to play one on television, it’s usually to the detriment of the Democratic Party and specifically to the political fortunes of President Joe Biden. Warren spent much of the 2020 presidential primary playing the Pied Piper, dragging her fellow contenders to the electoral wastelands of single-payer healthcare. Now, Warren is in the pages of the Wall Street Journal doing exactly what the president pledged not to do literally a month ago: publicly bullying the Federal Reserve.
Amid inflation hurdling towards the double digits, the Fed has begun the most overdue rate hike campaign in its history. Even now, with core inflation indices on the rise and consumer price index inflation catapulting to more than 9% during the past 12 months, the federal funds interest charge has not yet hit a full 2%, rendering real interest rates still well into the negatives. Even if the Fed votes this week to pass an unprecedented rate hike of 100 basis points, or a full percentage point, nominal interest rates will still be just shy of 3%, and real ones will remain negative.
Naturally, Warren has decided to warn Fed Chairman Jerome Powell and his partners that even their glacierlike pace is too swift.
“As with any illness, the right medicine starts with the right diagnosis,” Warren writes. “Unfortunately, the Fed has seized on aggressive interest rate hikes — a big dose of the only medicine at its disposal — even though they are largely ineffective against many of the underlying causes of this inflationary spike.”
It’s true, as Warren says in the Wall Street Journal, that Powell has publicly conceded that rate hikes may not immediately affect the price of highly inelastic goods such as oil and food, but neither Powell nor progressives have ever given much stock to the overall inflation measured by CPI. The Fed instead prioritizes core CPI and core personal consumption expenditure inflation (a separate measurement), which is still increasing and directly affecting everyday people. Furthermore, the Fed has only one blunt instrument, which is precisely why serious monetarists and mainstream economists, such as the unfairly maligned Larry Summers, warned the likes of Warren to avoid triggering an inflationary cycle like this in the first place.
“Low unemployment and high inflation are painful, but a Fed-manufactured recession that puts millions of Americans out of work without addressing high prices would be far worse,” Warren says at her conclusion, revealing her real thesis. And to that, anyone who actually made it through her slog has to ask: IS IT?
The question should theoretically answer itself with the premise of Warren’s entire article. Unlike recessions, which can be solved with a multitude of solutions by either monetary policy or fiscal policy, inflation can really only be solved by the Fed’s single blunt instrument.
Basic Keynesianism, to which liberals used to pretend to adhere, tells us to spend against the wind. The federal government should save tax revenue with modest budget surpluses in times of economic growth and use deficit spending to heat up the economy in times of demand slumps. Theoretically, as Warren’s Magical Modern Monetary Theorist allies claim, the government can use fiscal policy to reduce the money supply with taxation, but as Biden’s current dilemma illustrates, that’s politically impossible.
It’s far more progressive to penalize banks and investors with rate hikes, which really only trickle down to select people taking out loans today, because, in the end, inflation is always regressive, meaning it hurts the poor the most. This regression has two facets. First, today’s particular price hikes are disproportionately hitting the necessary goods featuring the least elastic demand, such as gas and food. Second, inflation, by its very structure, discriminates against the poor, as wealthier people have more room to re-budget and save. Those living paycheck to paycheck can adjust their spending only to the point of the bare necessities of survival.
A recession means consumer demand and investor capital is limited, but the sort of inflation we’ve stoked means that the very rules of the game are broken. Inflation renders price signals meaningless, wage increases worthless, and savings incinerated. It’s not a coincidence that the past decade of near-zero interest rates, a risk chosen by the Fed despite the longest bull market in history, coincided with the largest transfer of wealth to the wealthy in modern history. Warren is right that Powell is faced with a binary choice: a bad recession now or an even worse one later. Her attempted reality check, however, is nothing more than a progressive fantasy.
