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In his State of the Union address, President Joe Biden sought, as do all presidents, to depict the American economy as humming along and to take credit for it.
The narrative, however, hit a substantial road bump when it got to inflation.
In Biden’s telling, there are no macroeconomic causes of inflation.
There wasn’t excessive fiscal stimulus when Congress approved $3.6 trillion in debt-financed COVID-19 relief, on top of underlying trillion dollar annual deficits.
There wasn’t excessive monetary stimulus when the Fed’s balance sheet increased from less than $1 trillion in 2008 to nearly $9 trillion today, and it artificially suppressed interest rates during that entire period.
Instead, in Biden’s telling, higher prices today are exclusively a microeconomic phenomenon, the result of supply-chain issues as the economy recovers from the COVID-19 slowdown.
You can't tame inflation with subsidies, regulation
Biden’s approach to fighting inflation is to attempt to reduce the price or increase the supply of specific commodities and services through government subsidies or regulations.
In the speech, Biden proposed subsidies or price controls for computer chips, prescription drugs, health care premiums, weatherization projects, renewable energy, electric vehicles and child care.
If inflation is an economywide phenomenon, as it clearly is, it can’t be tamed one product or service at a time. And attempting to do so through government subsidies and regulation can actually aggravate the problem.
Biden’s proposed government interventions will be paid for either through additional borrowing or higher taxes. To the extent inflation is the result of excessive fiscal stimulus, even more borrowing adds fuel to it. And higher taxes rob the private sector of funds to improve productivity throughout the economy, to channel them to the limited sectors of the economy receiving government favor.
If inflation persists, Biden will continue to struggle
There has been lots of talk about Biden’s need to make a pivot to improve Democratic prospects in the 2022 elections. There was no pivot in this speech. Instead, there was a doubling down on the agenda stalled in the Senate and which has not met with enthusiasm from the body politic.
On inflation, no pivot is possible. People perceive, accurately, that it is eroding their standard of living. That’s particularly true of middle-class and lower middle-class workers.
Excessive monetary stimulus has artificially increased the value of assets owned by the affluent. Those artificial gains are at risk as the Fed attempts to unwind its monetary stimulus. But the political hurt from inflation is concentrated among those whom Democrats regard as their natural constituency.
Biden attempted a pivot of sorts on inflation, expressing sympathy for its effects rather than dismissing it as transitory, and purporting to have an agenda to deal with it.
But inflation is its own truth test. Come November, it will either continue to be elevated and eroding standards of living, or it won’t. If it continues to be elevated and eroding standards of living, as is likely, Democrats will have great difficulty making the election about other things.
GOP stands to benefit, even though it shouldn't
Republicans stand to be the political beneficiaries of public concern about inflation. This is richly undeserved.
Most of the excessive fiscal stimulus in response to COVID-19 occurred when Donald Trump was president and was supported by congressional Republicans. Throughout Trump’s tenure as president, he was jawboning the Fed to pursue even greater monetary stimulus.
Politics, however, isn’t necessarily fair. The party in charge gets excessive credit and blame. Sometimes it’s enough to just be the other guys. This election seems to be shaping up as one of those times.
Substantively, getting inflation under control lies with the Fed. Congress may retreat to the previous trillion dollar deficits, rather than the blowout COVID-19 spending of trillions of dollars more. But fiscal policy will remain on the stimulus side of the meter.
The Fed was in uncharted territory in sustaining a strong monetary stimulus regimen for a decade and a half. It will be in uncharted territory unwinding it.
Political fortunes will rise and fall based on how skillfully it does that.
Reach Robb at email@example.com.
This article originally appeared on Arizona Republic: Biden's State of the Union went off the rails on inflation