Biden undermining Federal Reserve’s efforts to curb inflation

OPINION:

Federal Reserve Chairman Jerome Powell has gone to considerable effort to convince observers that he will raise interest rates as much and as long as necessary and risk a recession to bring inflation under control. With varying measures of resolve, central bankers in other Western industrialized countries, save Japan, are joining him in tightening monetary policy.

Almost like a morality play, however, the excesses of politicians and fiscal policy are conspiring to limit the potency of higher interest rates and stoke inflation.

In a nutshell, monetary and fiscal policy are pulling most advanced economies in opposite directions, and badly conceived climate change and wartime economic policies make it all worse.

The European Union is distributing and member states are spending about $800 billion in pandemic recovery funds. These are intended for investments in green energy, modernization and national competitiveness — not to shore up national budgets.

This program was conceived before the invasion of Ukraine, sanctions and termination of Russian natural gas, which may be shuttering permanently much energy-intensive manufacturing in Germany and elsewhere.

EU and other continental governments are seeking to cushion the blow of higher energy prices on households, industry and small businesses with more than $300 billion in new relief spending — those bear considerable resemblance to pandemic relief efforts in 2020 and 2021.

The U.K. will likely be spending and cutting personal and corporate taxes to the tune of about $250 billion to get through the energy crisis and boost incentives to boost growth.

Deficit spending or even spending partially funded by tax increases to catch the windfall profits of energy companies is hardly what national governments should be doing when the aggregate demand for goods and services already exceeds the supply, and central banks are raising interest rates to curb consumer spending and private investment.

Putting it bluntly, the European Central Bank and Bank of England are hitting the brakes while European political leaders are jamming the accelerator to the floor.

The Europeans — at the behest and with the support of Americans —h ave chosen economic war and materiel aid to Ukraine, without taking the political measures that should accompany wars in parliamentary systems.

These include the designation of wartime prime ministers, unity cabinets and rationing of life’s essentials — fuel, food and so forth — and price and wage controls to curb inflationary pressures that have fundamentally political, not economic, origins.

Popular discontent with the effects of higher energy and food prices on overall living standards are turning into extremism and rather non-Euclidean economic reasoning. How else could you explain a debt-burdened and isolated Britain turning to tax cuts at a time like this, Italy electing a right-wing government with fascist roots and demonstrations in Eastern Europe implicitly supporting Vladimir Putin’s rationalizations for his atrocities in Ukraine?

For more than a decade, escaping deflation — boosting inflation by whatever measures may be necessary — has been the policy to revive growth, but Japan’s problems are not rooted in shortages of demand.

Rather, it has a virtually stagnant labor force — the product of too few births and very limited immigration. More importantly, what the Japanese economy does best — run large, complex industrial operations — unfortunately inspires poor innovation and growth.

For the last several decades, economic dynamism in America has been driven by startups that quickly grow to challenge established companies — Apple, Microsoft, Intel, AMD, Tesla and the like.

America’s top universities turn out entrepreneurs in sufficient quantities to lead risk-taking, whereas Japan’s educational system mints company men — the Asian analog to IBM’s 1980s executive in the bland gray suit and tan raincoat.

The Bank of Japan is locked into a false paradigm by keeping interest rates low.

All that is taking the exchange rate for the dollar up against the euro and the yen and making inflation worse in Europe, sustaining Japan’s export-driven economy more difficult and tanking the dollar value of the overseas earnings of American corporations. The latter is of no small consequence for U.S. stock prices and the financing of U.S. R&D and new investments.

The Fed faces domestic structural problems too — a mismatch between the skills of available workers, costs of transitioning to a greener economy, federal energy policies that curtail oil and gas production before electric vehicles are in adequate supply, and the impact of droughts that are gripping food markets.

But President Biden is dumping huge amounts of borrowed money on the U.S. economy through his infrastructure program, the CHIPS Act and most importantly student loan forgiveness. The latter could cost $1 trillion before it’s all done and virtually give university presidents the power to issue Treasury debt.

If Mr. Powell has signed on for the duration of the war on inflation, he better start angling for a third term. The battle can’t be won without more responsible leadership at the White House.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.