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The Fed Blew It, But Blame Isn't Solely Theirs
Yesterday, President Biden said he understood the inflation happening in America. In a coordinated effort, Treasury Secretary Yellin took the blame for missing it. Biden summoned Fed Chief Powell to the White House to talk about it. In today’s WSJ, Democratic economic mouthpiece Professor Alan Blinder wrote an editorial to say inflation wasn’t that bad and it really wasn’t the Fed’s fault. His editorial was a deflection of blame.
Predictably, reliable leftwing mouthpiece The Washington Post had a tweetstorm backing up the administration’s “facts” so the lefties that follow them can use their confirmation bias to deflect any blame away from government policy.
One important thing to note; the costliest input to production is the cost of labor, not materials. The second most important cost of production is the cost of energy to power the plant and distribute the goods. Government policy has done a lot to increase the cost of both of these inputs since 2020.
I will say this, the seeds for inflation were planted during Covid. It wasn’t just the shutdown of the supply chains in virtually every industry which should never have happened. The seeds for inflation were sown in the gigantic spending packages Congress continually passed.
My conservative friends like to point to March 2021 when Biden passed two trillion of more spending due to Covid but during 2020 in Trump’s administration, plenty of Covid spending was passed as well. I heard Mark Levin chattering on and on about this but I think Mark isn’t exactly correct.
I think it’s best to try and be objective when analyzing this issue. You can’t say that Biden’s spending was bad and Trump’s wasn’t.
I do think that Biden’s spending was the straw that broke the camel’s back and lit the whole tinderbox on fire. But, the seeds were there. The Grumpy Economist writes,
The government basically did a fiscal helicopter drop, five to six trillion dollars of money sent in a particularly powerful way. They sent people checks, half of it new reserves, half of it borrowed. It's a fiscal helicopter drop. Imagine that this had been simply $6 trillion of open market operations. Well, as Larry just told us, $6 trillion more $10 bills and $6 trillion fewer $100 bills won’t make much difference. If there had been no deficit, it certainly wouldn't have had such a huge effect.
The impulse was not the fault of interest rate policy either. Interest rates have just been flat. One can blame the Fed for contributing to the great helicopter drop, but not for a big interest rate shock.
The Fed blew it by having easy money. But, their mistake goes back as far as 2009. Some of it was a response to crappy government policy. For example, the federal legislature bailed out Wall Street (mistake). The Fed had to respond.
Where the Fed blew it was in their quantitative easing policy forever. They kept the interest rate at 0% for almost the entire sum of President Obama’s term. Because our environment in America is highly politicized, this chart leads conspiracy theorists to lend credence to the statement that the Fed hates Republicans….
Instead, I think it is because the Fed is full of economists that frame and model the economy the wrong way. They believe in central planning. Virtually everyone who is running anything of note in the current administration believes in strong central planning.
Central planners might be smart and credentialed, but they are often very very wrong.
Here is a chart of the Federal Budget’s mandatory government spending. The political fights we see every day are over 9.1% of the budget.
If we really want to tackle inflation in the US, we have to had some very hard discussions about the mandatory spending in the budget while reigning in discretionary spending.
Liberals will jump to cutting the defense budget. It’s 16% of the total and we probably are underspending given the state of the world these days. When we hear about ideas to reform social security, liberals go nuts saying we are throwing grandma over a cliff.
What about the idea of turning federal pensions into defined contributions instead of defined benefits? We know Illinois Democrats fight that tooth and nail and it is bankrupting the state. But, if we did pension reform at the federal level, how many millions of dollars could we save? Of course, most of it would be future savings, but at least we’d be on the right track.
I think a series of “small ideas” could turn into a lot of savings. But, the elephant in the room is truly things like social security.
By the way, if you are a millennial or younger and reading this, you are on the hook for paying for all the largesse and bad federal programs that were instituted as far back as 1933 in The New Deal. Hope you enjoy it.
There is also a need to reform the entire federal bureaucracy. That means cutting the size of it but also cutting down the scope of it. Yesterday, the Department of Health and Human Services said it is forming a department dedicated to “environmental justice” whatever the heck that is. I will tell you what that is. It’s a department dedicated to taking on political enemies.
The entire bureaucracy is riddled with things like subsidies, mandates, price supports, and price ceilings which screw up underlying markets and limit competition. Health care is one example.
The federal government cannot solve your every problem or be your babysitter. That’s not how America is designed to work. Also, if you are rich just paying taxes and having the Feds or other more localized government agencies “take care of it” while you live your life isn’t a solution either. Nope, you have to enact policies that enable people to pull themselves up. We don’t have that today and under this administration, it is getting worse.
The Federal bureaucracy is highly politicized, and it leans hard left. If we learned one thing in the trial of Michael Sussman it was that. You couldn’t even get an objective jury pool from the population that lives in DC and the surrounding areas.
I love this tweet from Chicago Booth and classical economist Casey Mulligan. Joe Biden and aggressive bureaucrats caused the baby formula crisis.
When you start to look closely at every industry, the root cause of a lot of our problems in supply chains boil down to really really bad regulations and overtly aggressive bureaucrats that make life extremely hard for people who want to start a business or are in business.
Large multinational corporations can figure out ways to deal with them. They also are so large and the regulations make the industry sector so anti-competitive, they have some modicum of pricing power and can pass the cost to you.
On my recent drive across the country, I patronized an independent coffee shop in Green River, Utah. One lady behind the counter owned it. I am pretty sure she is politically different than me because she was wearing a mask. Mask wearers aren’t conservatives.
Green River had two truck stop chains open up. They are paying counter help $18/hr. She can’t compete. She has much shorter hours, but that is probably more efficient for a coffee shop in a small town. She can’t get any labor because the alternative to working at her coffee shop is a government check that will pay more than she wants to pay. Her raw materials costs were up too. My heart went out to her.
The safety net for people increased so much during Covid, that small businesses cannot get people to work.
I was chatting with a friend who does work in the agricultural industry. I mentioned that I heard every slot at the slaughterhouse is full. He confirmed that. He went on to say at one plant in South Dakota they are paying an $8000 bonus to someone who gets a job as a meat cutter there. Just to let you know, it’s roughly $100MM to get a new plant up and running with tons of regulatory barriers set up courtesy of your federal and state governments. Once you do that, good luck getting labor.
To end on a political note, we know that liberals and the economists that support them believe in centralized planning over the free market to price, distribute and organize goods and services. They are a lost cause. You aren’t going to persuade people like Alan Blinder, Joe Stiglitz, or Mark Zandi that individuals acting in their own best interest and given the capability for freedom of choice will make better decisions and have better functioning marketplaces than their puppetry on a string.
They are just that much smarter than you.
You also won’t persuade the behaviorist wing of the economic establishment. Daniel Kahneman, Richard Thaler, and others are all focused on “choice design” and “nudging” so you make the best decisions. The problem is at government scale, it becomes totalitarian.
At the same time, there is a tremendous fight inside the right-wing. The GOPe wants to control the budget and spend it on things they deem correct. Not only that, their worldview isn’t that far removed from the left. They are smarter than the individual. Hence they favor a regulatory state, which entrenches big corporates and limits competition.
The other part of the Republican Party wants to take a hatchet to the bureaucracy, take on the reforms necessary to cut the deficit, and put their confidence in the individual to make the best decision for their life, not the government or some central planner. The problem is the Republicans that are in power who truly believe that are few and far between.
Vote accordingly in your primary, and in November if you truly want change.