Scapegoating prevents a return to fiscal sanity

Scapegoats are popular in modern politics. Consider America’s current experience with inflation. When President Biden took office, the consumer price index was 1.4 percent, year-over-year. Since his inauguration, that number has climbed to 8.5 percent.

The Biden administration has been reluctant to own the problem, recently turning Vladimir Putin into its own scapegoat with a misleading narrative about “Putin’s price hike.” To put things mildly, Putin is not a good actor on the global stage, but the Russian autocrat is not the primary cause of pain at the pump, in the grocery store, or anywhere in between. Not even close.

In the month prior to Russia’s invasion, inflation was already 7.5 percent. West Texas Intermediate crude oil was trading at $53 a barrel when Biden took office but had nearly doubled to $90 a barrel weeks prior to the invasion. To be fair, heightened political risk did contribute to the rising oil price as tension over Ukraine grew, but the broader picture is clear: The inflation train had left the station long before Putin’s tanks began to roll.

Milton Friedman rightly argued that “inflation is always and everywhere a monetary phenomenon, in the sense that it can be produced only by a more rapid increase in the quantity of money than in output.”

Friedman was not speaking in a theoretical vacuum. He cut his teeth during a period of economic tumult in the 1970s, which saw a rapid expansion of the money supply. Four times in that decade, the U.S. money supply grew by more than 12 percent annually. Simultaneously, the U.S. suffered what economists call a “supply shock,” as oil embargoes affected the availability not only of oil but of the entire supply chain.

Together, these two factors generated double-digit inflation that necessitated massive interest-rate hikes at the outset of President Reagan’s first term.

While history may not repeat itself, it often rhymes. As the Covid pandemic unfolded, the U.S. money supply grew by an astounding 25 percent in President Trump’s last year in office. President Biden took that smoldering fire and dumped gasoline on it with the American Rescue Plan. In total, the U.S. money supply has increased by nearly 41 percent since the beginning of the pandemic, more than any period since World War II. Apologists for this spending spree contend that the U.S. would be far worse off had it not authorized an unprecedented $13.9 trillion in Covid relief. But this argument is a strawman that presupposes that the alternative was to do nothing. It does not consider whether we could have moderated the prolonged shutdowns that necessitated relief in the first place. Nor does it consider the extent or form of relief authorized.

The vast majority of Americans did not lose their jobs during the pandemic. That did not stop a series of four direct payments that gainfully employed people still reaped, three under the Trump administration and one under Biden. Those who did lose their jobs received enhanced unemployment benefits that had two-thirds of recipients making more in unemployment than in their previous job and one-fifth of recipients more than doubling their previous income.

Business support like the “Paycheck Protection Program,” a forgivable loan designed to help businesses maintain payroll during lockdowns, lacked proper checks to ensure that it went to companies actually effected by the pandemic. Meanwhile, the Federal Reserve’s asset-purchasing program pumped over $4 trillion into the stock market, creating a wild speculative bubble that is on the verge of implosion.

Harm could have been mitigated by not shuttering the bulk of our economy, and relief programs could have been far more targeted and proportionate. Instead, in a town already known for its excesses, both Republicans and Democrats got spend drunk. The prevailing sentiment seemed to be “if a little bit is good, a lot must better.”

Early on, a surge in inflation was averted by the disruption of traditional spending patterns. Stuck at home, many people saved much more of what they were either earning or receiving from the government (the latter of which, of course, had increased substantially). From February to April 2020, the personal-savings rate ballooned from 8.3 percent to a peak of 33.8 percent. It remained elevated for some time, but as Covid fatigue grew and the economy reopened, people began spending again. Last month, the savings rate was down to 6.3 percent.

This torrent of previously sidelined dollars found its way into a market still suffering from severe supply constraints caused, in large part, by government lockdowns and relief policies that provided disincentives to returning to work. The persistence of this elevated inflation ought to have been predictable to anyone who has ever opened an economics textbook. The law of supply and demand had not been repealed.

For decades, conservatives have warned about the dangers of expansive monetary policy, runaway spending, and government’s stifling intrusion into free markets. Proof of how damaging this toxic brew is to the well-being of Americans is staring us in the face.

If there is any silver lining, this crisis represents an ideal opportunity to forcefully refute progressive ideas, such as the so-called Modern Monetary Theory, which essentially holds that deficit spending does not matter, and to remind Republicans that they must govern the way they campaign, which is to say conservatively.

Seizing this opportunity cannot be done by looking for scapegoats and ignoring the actual causes of inflation. Restoring sustainable monetary and fiscal policy and securing America’s future will require owning the decisions that led us to this moment so we can make better ones tomorrow.

This column appeared in National Review on May 4, 2022.