Green policies risk the return of inflation
Warning lights should be flashing. Less than a month in, it’s becoming evident that President Joe Biden’s economic policies are likely to end in disaster. The wrong economic diagnosis and the politics of not letting any crisis go to waste is leading to the most damaging mix of economic policy in decades.
The administration is in thrall to the Keynesian demand-management paradigm that treats every big economic downturn as a potential replay of the Great Depression, thus requiring massive fiscal and monetary stimulus to revive demand. But the Covid slump wasn’t driven by lack of demand, but by deliberate policy decisions taken by federal and state governments to close down economic activity for reasons of public health.
For the time being, Covid policy iseconomic policy. The 11 states with the highest unemployment are all deep blue; they imposed some of the nation’s most draconian lockdown policies. Eleven of the 12 states with the lowest unemployment rates are red states. Thus, the pace of economic recovery will be dictated by how quickly the brakes are taken off measures to control the pandemic.
Yet in response to a deliberately engineered supply-side contraction, the Biden administration’s prescription is a $1.9 trillion stimulus. This idea drew stinging criticism from no less than Larry Summers, the former Treasury secretary, who reckons the Biden stimulus is three times larger than the projected gap in output. Together with unprecedentedly loose monetary conditions overseen by Fed chair Jay Powell, we face “the risk of inflation expectations rising sharply,” Summers argued.
As if on cue, the Fed chair stoked those expectations. “Frankly, we welcome slightly higher . . . inflation,” Powell declared last month. “The kind of troubling inflation people like me grew up with seems unlikely in the domestic and global context we’ve been in for some time,” he said – words that could well come back to haunt him should inflation take off.
via The Global Warming Policy Forum
February 18, 2021 at 09:28AM