The Inflation Governance Conundrum of a Biden Administration

  Since US President Biden took office, the US economy has achieved a strong recovery from the epidemic. In 2021, the US GDP growth rate will reach 5.7%, and the unemployment rate will also fall below 4%. However, since the second quarter of 2022, U.S. inflation has continued to rise, with the consumer price index (CPI) rising to 9.1% in June, the highest level in 40 years. High inflation has exacerbated popular dissatisfaction, and Biden has repeatedly said that managing inflation has become the government’s “top priority.”
High inflation comes from strong stimulus

  The strong economic stimulus of the Biden administration is the main reason for the recent increase in U.S. inflation. When Biden was elected president, the U.S. economy was in the midst of a severe recession brought on by the pandemic. In order to promote economic recovery as soon as possible and fulfill his campaign promises, Biden launched a US$1.9 trillion “US rescue plan” as soon as he took office, which objectively has achieved obvious results in promoting economic growth. However, many economists, including former Treasury Secretary Summers, pointed out at the time that after Trump has implemented multiple rounds of fiscal stimulus, the scale of the “US rescue plan” far exceeds the output of the US economy. A gap will lead to inflation. Starting in April 2021, U.S. inflation will continue to rise. At the same time, based on concerns about the recurrence of the epidemic, the Federal Reserve has been slow to start the tightening process when the inflation rate is much higher than the “ideal target” of 2%, adding fuel to the fire.
  Following the outbreak of the Russian-Ukrainian conflict, along with soaring global energy and food prices, domestic inflation in the United States quickly rose to the highest level in the past 40 years. Biden is trying to pass the blame on to Russian President Vladimir Putin, blatantly calling it “Putinflation.” But in fact, the apparent rise in U.S. inflation occurred well before the conflict between Russia and Ukraine, and the core inflation rate, excluding energy and food price factors, has now reached a high of nearly 6 percent. It is undeniable that factors such as a poor supply chain and the conflict between Russia and Ukraine have “contributed” to the high inflation in the United States, but the main reason is the excess demand brought about by the massive stimulus policies of the Biden administration. As scholars have studied on the high inflation in the 1970s, people focused on supply-side factors such as the oil crisis during the process of high inflation, but later found that the root cause was excess demand.
  The Biden administration has also grossly misjudged the inflation situation. High inflation in the United States was already very serious in mid-2021, but the Biden administration was pushing hard at the time to promote the “Building Back for a Better Future Plan”, which required massive fiscal spending to support it. Therefore, Biden has repeatedly claimed that the increase in inflation is only “temporary”. In mid-2021, Treasury Secretary Yellen also predicted that the US inflation level will fall back to about 3% in the second half of the year. The Federal Reserve has also expressed many times. Same judgment. Although the “temporary” repeatedly emphasized by key members of the Biden administration when talking about inflation has political and publicity considerations, it also reflects their internal cognitive biases on the inflation situation. The reason for this is that, on the one hand, the inflation level in the United States has been stable at a low level since the 1990s. After the international financial crisis in 2008, it could not even rise to the target level of 2%. The memory of high inflation; on the other hand, it is because the Biden administration believes that high inflation mainly comes from the excessive demand for commodities by residents in the context of the epidemic. With the improvement of the epidemic, the focus of residents’ consumption will shift from commodities to services, and the level of inflation will gradually increase decline. Looking at it now, the restart of the service industry has further led to higher service inflation, while commodity inflation has not fallen accordingly. Behind all this is the still strong consumer demand of residents.
Insufficient Governance Policy

  At the end of May this year, Biden published an article in the media expounding his government’s plan to deal with high inflation, which mainly included three aspects: First, highlighting the role of the Federal Reserve in managing inflation, emphasizing that the Federal Reserve is the department mainly responsible for dealing with inflation, and the government respects its Independence and will not interfere in the process of raising interest rates; second, it is claimed that the government’s economic policy has played a role in curbing inflation, saying that the “infrastructure plan” has alleviated supply chain problems such as port congestion and insufficient truck capacity, and the “social security plan” can To further protect the basic needs of households, but need the support of Congress; the third is to emphasize the control of inflation by reducing the fiscal deficit, saying that the fiscal deficit in 2022 will be reduced by 1.7 trillion US dollars, mainly due to the strong tax revenue brought by the economic recovery. However, a careful analysis of Biden’s inflation governance policy will reveal that the policy is obviously not sincere.
  First of all, the so-called “respect for the independence of the Federal Reserve” may be more of acquiescence and connivance. The Federal Reserve is indeed the main department dealing with inflation. The high inflation in the 1970s was finally controlled by the strong monetary policy promoted by then-Fed Chairman Volcker. The Fed started the tightening process at the beginning of this year, and has raised interest rates by 1.5% as of June. But record-high inflation suggests that the Fed is not raising rates enough. The current Federal Reserve Chairman Powell has repeatedly stated that he will not raise interest rates sharply in a hurry, hoping to achieve a “soft landing” of the economy while controlling inflation, which coincides with Biden’s emphasis on the hope that the US economy will shift from a high-speed recovery to stable growth. Biden wants inflation to be contained, but is also reluctant to raise interest rates too fast, creating recession risks for the economy. Unlike Trump’s pressure on the Fed to lower interest rates, Biden is reluctant to bear the stigma of “interfering with the Fed” in order to control inflation. More importantly, from a personal political point of view, Biden lacks the courage to take the initiative to cool the economy quickly.
  Second, Biden’s other two policies are more of pushing his own agenda in the name of tackling inflation. The Biden administration launched a $550 billion “Infrastructure and Jobs Act” at the end of 2021, but infrastructure construction requires a long period of time and cannot significantly improve the effectiveness of supply chain and transportation conditions in the short term. Supply chain problems have been resolved so far. The relief is more attributable to the relaxation of epidemic control in some countries, including the United States. “Social security programs” such as the housing supply action plan, child care, and elderly care subsidies have encountered huge resistance in Congress, and their introduction is still a long way off, not to mention ensuring that the living standards of American families under high inflation are not affected. Moreover, Biden’s economic policy agenda is more about stimulating the demand side, rather than planning for supply-side reforms, which will stimulate inflation by increasing government spending and budget deficits. Reducing the fiscal deficit does have a long-term effect on controlling inflation, but the short-term effect is limited. Biden’s reference to reducing the fiscal deficit is more of a defense of his own tax hike plan. Measures such as the release of oil reserves can also be described as a drop in the bucket for high energy prices in the context of the Russian-Ukrainian conflict. Biden failed to secure a promise from Saudi Arabia to increase production from OPEC during his first trip to the Middle East.
  The Biden administration is divided and hesitant about policy options to effectively tackle inflation. A report published by the Peterson Institute for International Economics at the end of March believes that trade policy adjustment is an effective means to reduce inflation in the United States. If the Biden administration can remove all the additional tariffs imposed on products of various countries during the Trump period, it can reduce the CPI level by 1.3 percentage points and save an average of US$797 per American household per year, while only canceling the additional tariffs imposed on China. A single action of the 301 tariff can reduce the CPI by one percentage point. Also, lower tariffs often act as a regressive tax, helping low-income households the most. Although this account is not too large, the effect of alleviating high inflation on low-income families is visible to the naked eye. Biden has also been considering using this method. He said in May that he would evaluate the reduction of tariffs on China, but has yet to take actual action. Of course, there are factors that are obstructed by the Republican Party, but it is mainly due to the huge differences within the Biden administration. Treasury Secretary Yellen has repeatedly stated that tariffs on China have “lost their strategic purpose” and will drag down the U.S. economy and boost inflation; Commerce Secretary Raimondo also pointed out in early June that the cancellation of tariffs on household goods, bicycles and other products Help reduce the pressure on consumers. In this regard, Trade Representative Dai Qi and President’s National Security Adviser Sullivan clearly expressed their opposition, believing that the removal of tariffs will make the United States lose “precious chips” in negotiations with China. Biden, on the other hand, is torn between wanting to make significant progress in controlling inflation without appearing weak in the face of his political opponents. Internal divisions and Biden’s hesitation have kept the administration from making real progress in cutting tariffs, and consumers have to continue to face high inflation.
Weak Inflation Governance Threatens Midterm Elections

  Inflation remains high and the economy is on the verge of recession. It has become the top domestic political issue in the United States, and it is having a negative impact on the Biden administration’s ruling status and the Democratic Party’s election in the midterm elections. Since Biden took office, despite some achievements in economic recovery, high inflation has seriously dragged down his popularity ratings. Polls show Biden’s approval rating, which has remained below 50 percent since August 2021, has now fallen to the lowest level of his tenure at 36 percent. The latest poll released by ABC News and polling agency Ipsos in June showed that 83% of Americans believe the economy is an important issue in determining how they will vote in the November midterm elections, with currency among them Inflation (80%) and gas prices (74%) were the biggest factors influencing their vote.

On May 31, 2022, U.S. President Biden met with Federal Reserve Chairman Powell (first from left) and Treasury Secretary Yellen (third from left) at the White House to discuss inflation.

  Faced with the highly uncertain epidemic situation, it is understandable that Biden will use strong stimulus to revive the U.S. economy after his election. However, since the beginning of this year, when the pressure of high inflation has continued to increase, the policy response of the Biden administration has indeed been too lagging and hesitant. There are not only factors that misjudg the duration of inflation, but also the “political calculus” that is worried that inflation control policies will drag down economic growth. However, if the Biden administration fails to effectively control inflation, the United States may witness the shortest prosperity cycle in history, and the economy faces the risk of rapidly turning into recession or even stagflation, and the consequences are gradually emerging.
  The Biden administration has missed the “best window” for controlling inflation. Before the mid-term elections, there is probably not much room to make policy choices that will make people “bright”. Short-term policy choices in the future are very important. It is unrealistic for a Biden administration to expect inflation to drop rapidly, and being able to stabilize it and keep it from getting worse is the only option it can make.

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