Comment on this story
One of the more persistent misconceptions affecting discussions of economics is that somewhere in Washington in a vault there are some dials that officials can turn to show jobs, production, inflation – even the price of gas. can control.
Whenever something good happens, a few politicians step forward to essentially acknowledge the dial repair. And if something bad happens, rest assured that the media and political opponents will blame the authorities for setting the dial wrong.
That came earlier this year as inflation began to rise and the President, Congress and the Federal Reserve were criticized for overstimulating the economy in response to the pandemic. We heard it again late last month when the government reported a contraction in second-quarter GDP, prompting dire and overblown forecasts of a recession by Republicans. And now Congressional Democrats are acknowledging the same fallacy they have imaginatively marketed as the “Inflation Reduction Act of 2022” through a package of climate, tax and health initiatives.
Senate nears passage of anti-inflation bill amid marathon debate
While there is a grain of truth in all of these criticisms, they stem from a flawed mental model of the economy and how it works. So let’s take a step back and see what’s really happening.
In the spring of 2020, as a global pandemic was about to plunge the world economy into a terrible depression, central banks and governments around the world printed trillions of dollars from virtually nothing to keep businesses from shutting down and shutting down. Were there workers who secure the income of the families. It worked: After a scary few months of falling stock prices and rising unemployment, the financial markets recovered, most companies continued to operate and most jobseekers were able to find them.
Unfortunately, as some of us have warned, governments will continue to provide this fiscal and monetary stimulus for a very long time.
The benign explanation, at least in the United States, was that officials were determined not to repeat what they believed – wrongly – to be a mistake of over-planning during the 2008 financial crisis and recession and inflation rate. Any great leap will be short-lived. An equally plausible explanation is that President Biden and a Democratic Congress, anxious not to “let a good crisis go to waste,” used it to increase public spending and investment to achieve economic, social, and environmental justice. done to justify the increase.
What does the Inflation Reduction Act say – and how it might affect you
At the same time, the Federal Reserve (whose chairman has not coincidentally just been reappointed) was unwilling to begin ending its extravagant money-printing for fear that the bubble it had created in stocks and real estate would burst. Were created in the real estate market or a labor market tight enough to eventually grant wage increases to low-skilled workers.
What is often forgotten is that the US economy was already largely out of whack before the pandemic and all this stimulus. For decades, the country lived well beyond its means, fueling large and persistent trade and budget deficits with an overvalued dollar, artificially low interest rates, and trading partners’ desire to recycle their surpluses back into the US economy. was loose. In fact, these imbalances have existed for so long that almost everyone felt they were the new normal and could last forever.
Given that pre-pandemic prosperity already relied on large doses of fiscal and monetary stimulus, it should come as no surprise that pumping in trillions of dollars in additional stimulus over the next two years would push prices and wages higher . Indeed, that was the point of this rescue effort – to stop a deflationary spiral, set a floor for household incomes, encourage investment and raise the prices of stocks, bank loans and real estate.
In the end, it is clear that policymakers ignored and exaggerated the warnings. But it is also true that economic policy is not a science and the world economy is not a system that can be controlled by a few buttons in Washington.
US policymakers misunderstood the threat of inflation until it was too late
No less concrete, of course, is Democrats’ claim that inflation will be largely controlled by a stripped-down tax and spending bill that closes corporate tax loopholes, widens and expands the clean energy tax credit. , expands health insurance subsidies for the working class. and gives Medicare the power to negotiate prices on more than a dozen drugs.
The Congressional Budget Office estimates that the Inflation Reduction Act is likely to change the inflation rate by less than a tenth of a percent over the next two years — but it’s not sure if the change will be up or down.
Even in the next five years, the package going through Congress will reduce the federal budget deficit by $25 billion — a rounding error in a $23 trillion economy, according to the Federal Budget Committee. Despite the final numbers, the measure will have little impact on the federal annual budget deficit, which is expected to run at a fluctuating rate of 5 percent of GDP over the next 10 years.
Equally stupid is Republican criticism that the same officials who inadvertently fueled inflation with too much stimulus have now turned it back and lit the fuse for a long and deep recession.
First, most of us don’t have enough sensitive economic antennae to tell the difference between an economy that produced 1 percent more goods and services over the past year and one that produced 1 percent less. was the gross domestic product, the measurement of GDP is very accurate, the difference is very small. The partisan hyperventilation about whether we’re in a recession has more to do with politics than economics.
With the economy and financial markets emerging from a deliberately induced Chinese high, the possibility that manufacturing, employment, home sales and stock prices may decline slightly is both healthy and necessary. Last year, the economy “created” more than 6 million jobs, an increase of 4 percent. In times of restricted immigration and too many baby boomer pensions, there is not enough labor to keep this momentum going or even to fill existing vacancies. And with government and household spending and credit hitting record levels, all fueled by stimulus, we shouldn’t be surprised if unemployment falls below its current historic — and unsustainable — 3.5 percent.
Yes, some workers may lose their jobs as the economy adjusts to more sustainable levels of spending and output, but employers show most should be able to find another. And the extent to which people aren’t finding jobs isn’t because some Washington officials got the macroeconomic scale wrong — it’s because workers are unwilling or unable to go where it is work there. Or because educational and labor market institutions do not produce the skilled workers that companies need.
Adjusting to a more stable and sustainable economic equilibrium cannot and will not be painless.
Compared to other things, stocks and real estate will go down in value and some of the debt will be used to write them off.
Some workers need to relocate to acquire new skills and find jobs, while employers may have to spend more to find and train workers.
Wages for the low-skilled would have to rise to attract and retain workers, while the increased earnings of those at the top would have to fall.
Government spending must be brought into line with government revenue. Families have to borrow less and save more. Interest rates would have to rise to near historic levels while the value of the dollar would have to fall, raising the relative value of what we import and lowering the apparent price of what we produce for the rest of the world.
The alternative to bringing things back into balance is to continue living with the cycle of ups and downs of the past 30 years. Preventing such an economy from sliding into recession would require extensive fiscal and monetary stimulus. It will also be an economy where the rich get richer and the poor get poorer. It will continue to be an economy that is increasingly and dangerously indebted to the rest of the world.
In short, a healthy, sustainable economy is not one that requires government officials to constantly and drastically adjust the macroeconomic scale in Washington to keep things in balance. Rather, it relies more heavily on the natural self-improvement mechanisms of open, competitive, and well-regulated markets.
Steven Perlstein was a longtime business columnist for the Washington Post and the author of Ethical Capitalism, published by St. Martin’s Press. He is the Robinson Professor of Public Affairs at George Mason University.