Fed Chairman Jerome Powell and President Joe Biden both wish to reduce inflation, prevent (or cure) a recession, and grow the economy.
Both receive the advice of top, uh, well-paid economists. Yet both favor precisely the opposite policies.
Powell recently said, “I do not think the U.S. is currently in a recession, and the reason is there are too many areas of the economy that are performing too well. This is a very strong labor market … it doesn’t make sense that the economy would be in a recession with this kind of thing happening.”
Translation: He doesn’t understand what’s happening but denies it’s a recession.
Yet he raised interest rates by 0.75 percentage points for a second consecutive time to “cool” the economy.
By “cool,” he means the economy is growing too fast, which causes inflation.
He wishes to slow economic growth, which in his opinion, will cure inflation but not cause the recession he denies already is happening. Apparently, Powell thinks the opposite of “inflation” is “recession.” But the two can occur together in what’s called “stagflation.”
Prices are a function of supply and demand. Inflation occurs when there is an imbalance: Too little supply to meet the demand. Today’s inflation, and indeed all inflations through history, are not caused by demand growth but by supply shrinkage.
Historically, demand increases are not sudden, but supply decreases can come overnight. So markets can adjust to the former but struggle to adapt to the latter.
Today, we have the confluence of many shortages: Oil (energy), food, transportation, computer chips, autos, lumber, appliances, homes, labor, and many items related to the basic shortages. In terms of inflation, the single most crucial shortage is the oil (energy) shortage.
Since the cause of inflation is shortages, curing inflation requires curing shortages.
But Powell’s interest rate increases do not address shortages. They do not increase supply. Interest rate increases reduce both supply and demand. They reduce supply by making borrowing by manufacturers more expensive. They reduce demand by making borrowing by consumers more expensive.
Powell hopes that his rate increases will cut demand more than supply. He has no way to know or control whether this will happen. It’s just a hope.
But Jerome, be careful what you hope for; cutting demand impoverishes the supplier section, which leads to a recession.
To quote the Wall Street Journal:
Inflation is a global phenomenon inflicting significant financial pain on families everywhere. Rising costs are an urgent problem, and interest rates play a key role in maintaining price stability.
But urgency is no excuse for doubling down on a dangerous treatment.
As with any illness, the right medicine starts with the right diagnosis.
Unfortunately, the Fed has seized on aggressive rate hikes—a big dose of the only medicine at its disposal—even though they are largely ineffectiveagainst many of the underlying causes of this inflationary spike.
It’s a global problem, as is COVID, but the U.S. can solve this problem within our borders if we use the correct solutions.
As we often have said, the Fed has been tasked with a problem for which it has no tools — shortages of crucial goods and services. Only Congress and the President have the tools to cure shortages.
Mr. Powell has acknowledged this. He noted that elevated interest rates likely wouldn’t bring down gasoline or food prices. “There are many things we can’t affect,” he admitted —namely, the key causes of today’s inflation.
This is a monumental admission. The man tasked with curing inflation has admitted he doesn’t have the tool to do the job. Still, he persists in using that one tool that will lead to recession.
Higher interest rates won’t end skyrocketing energy prices caused by Vladimir Putin’s war on Ukraine. They won’t fix supply chains still reeling from the pandemic.
And they won’t break up the corporate monopolies that Mr. Powell admitted in January could be “raising prices because they can.”
If the Fed’s interest-rate hikes won’t address many causes of today’s inflation, it’s worth asking: What would they do?
When the Fed raises interest rates, increasing the cost of borrowing money, it becomes more expensive for businesses to invest in their operations.
As a result, employers will slow hiring, cut hours and fire workers, leaving families with less money. In the bloodless language of economists, that’s referred to as “dampening demand.”
It also is referred to as “causing a recession.”
But make no mistake: If the Fed cuts too much or too abruptly, the resulting recession will leave millions of people—disproportionately lower-wage workers and workers of color—with smaller paychecks or no paycheck at all.
But that is the whole plan. Make lower-wage workers and workers of color pay to stop inflation. The general sends the poor to the front, not caring how many die.
Mr. Powell has even conceded that the Fed’s actions may lead to a downturn, saying recession “is not our intended outcome at all, but it’s certainly a possibility.”
If all you have is a hammer, every problem looks like a nail. Who cares whether it works or not?
Despite these warnings, the Fed chairman still has cheerleaders for his rate-hiking approach. Chief among them is Larry Summers. “We need five years of unemployment above 5% to contain inflation—in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” the former Treasury secretary recently told the London School of Economics.
You read that correctly: 10% unemployment. This is the comment of someone who has never worried about where his next paycheck will come from.
Summers is a magical example of the Peter Principle: Being promoted to his level of incompetency is his sole success. What next, Larry? Kill the elderly to cut Social Security costs?
If Messrs. Powell and Summers have their way, the resulting recession will be brutal.
As in past downturns, Republicans in Congress will press for austerity—tax cuts for giant corporations and the rich, weaker regulation on big businesses, and little economic support for the most vulnerable.
Democrats should be ready to reject the Republican playbook and prepared to help working families survive.
Well, maybe, just maybe, the Dems are listening, especially if Sen. Joe Manchin remembers he’s a Democrat.
President Biden has slowly but substantially re-engineered significant parts of the American economy — achievements obscured by COVID, inflation and broad disenchantment. e domestic semiconductor industry, and accelerated U.S. viral research and vaccine production capabilities.
- He might be on the cusp of the biggest domestic clean-energy plan in U.S. history.
- The $280 billion CHIPS and Science Act provides grants, tax credits and other incentives to manufacture computer chips in the U.S. The White House says it’ll eventually lower the price of cars, dishwashers and computers.
- Biden could get another huge win with the climate plan secretly negotiated by Senate Majority Leader Chuck Schumer and Sen. Joe Manchin. The package would provide new tax credits for buying EVs — plus rebates for buying efficient appliances and weatherizing homes, and tax credits for heat pumps and rooftop solar panels.
- Biden’s $1 trillion infrastructure bill to rebuild roads, bridges and rail is one of the biggest packages signed by a president ever.
- The Biden administration said it’ll pour $3 billion into the vaccine supply chain, creating thousands of U.S. jobs, and helping prepare for future threats.
- Electric-vehicle manufacturing is growing in the U.S., with GM and Ford announcing plans for massive vehicle and battery plants across the Midwest and Appalachia. Fun fact: GM’s Mary Barra, who also chairs the Business Roundtable, is the CEO this White House has hosted most often.
These developments required bipartisanship (remember that?) — something Biden promised but gets little credit for, since these thin bands of Republican support look nothing like traditional bipartisanship.
Biden has only a bare 50-50 Senate “majority” (depending on Sens. Manchin and Sinema). Even then, he is limited by reconciliation to avoid a purely political GOP. It has no ideas for anything but will filibuster everything the Dems submit.
Somehow, Biden managed to accomplish far more than Trump ever dreamed of. This is partly because Trump is an incompetent, corrupt psychopath, who cares only about himself, and the GOP is a crooked election machine.
But much credit belongs to “weak, timid” Biden, who plays the long game, insults no one, closes no doors, knows how to negotiate, and doesn’t whine about everyone else being at fault.
Whereas Trump split his time evenly among golf, tweeting insults, and self-aggrandizement, Biden moved slowly, quietly, but surely to accomplish, accomplish, accomplish.
Now, if only Powell would stand up and say, “I don’t have the right tool. Interest rates won’t cure shortages. Congress must pass spending bills to end key scarcities. That would end inflation and enrich the economy. And the people would thrive.”
That bit of honesty would send more shock waves through Congress than the attempted coup did.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps: Ten Steps To Prosperity:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.