OPINION:
Chairman Jerome Powell appears bent on risking 1970s-style inflation to win favor with President Biden and a second term.
Like the two World Wars, COVID-19 has radically changed the American economy. It has accelerated trends that would have disrupted markets more gradually, and the lockdowns inspired many workers to retire or otherwise leave the job market. Those should not be confused with the unemployment associated with a recession, and that easy money can help alleviate.
Before COVID-19, we had the technology to work from home, but employers clung to old myths. For example, workers are too distracted at home and won’t be motivated when many are more productive absent commutes, and with limited physical interface with colleagues.
As offices reopen, New York and other cities face a crisis. After years of abusing commuters and overtaxing them, many workers don’t want to return—at least not five days a week.
Transit systems, office towers, vast networks of sandwich shops, and expense account restaurants must now operate at well less than full capacity, but they still can’t find enough workers. The situation should improve in September when schools reopen, and federal supplemental unemployment benefits end. Still, the ambition among the displaced waiters, bartenders, and catering managers has moved into the digital economy, shipping, mortgage financing, and other activities that thrived despite COVID-19. They have discovered a few months of intensive employer-sponsored training or on-the-job mentoring can unlock higher wages, better working conditions, and a career ladder.
Nothing Washington did enabled those workers. The hustlers shunned the dole and liberal propaganda that the system is stacked against them.
Less congested cities will face fiscal crises in the next few years, but when help wanted signs abound in store windows, we can’t say that’s recession-driven. It’s high taxes and lousy public services.
Throughout the economy, supply bottlenecks limit production. Those will take years to work out and continue to create inflationary pressures.
Underinvestment in the production of raw materials has come home to roost, and the pandemic’s continued grip on developing nations constrains manufacturing. In Vietnam, workers are sleeping in factories to avoid COVID-19 exposure.
The pandemic revealed global supply chains are pulled too taut. A Japanese semiconductor factory fire can limit auto production globally, and we are nearing the limits of cheap labor from Asia.
A good deal of the $6 trillion in stimulus and relief money spread around by Presidents Trump and Biden is still sitting in household and corporate checking accounts. As masks continue to come off, those will create more demand than businesses can supply and more inflation, but Mr. Powell’s easy money policies have important political imperatives.
With COVID-19, the national debt held by the public has rocketed to 110 percent of GDP, but federal interest payments have hardly budged. The Fed has pushed down interest rates paid on government bonds by printing $4 trillion to take Treasury and mortgage-backed securities off the market.
Mr. Biden’s proposed $4 trillion infrastructure, industrial policy, and social spending will hardly be fully financed with new taxes. Too many of his proposed levies are unpopular within the Democratic caucus. He must borrow more and rely on the Fed to print money to purchase even more Treasuries or let interest rates rise.
Higher interest rates would curb new home construction and raise costs in capital-intensive industries like electric vehicles, green energy, and semiconductors, the president wants to boost.
The media is quick to support Mr. Powell’s fanciful storyline that inflation is temporary. According to Bloomberg Economics, more than half the recent jolt in prices has been caused by used and rental cars, vehicle insurance, lodging, airfares, and restaurants. Higher prices for groceries, bicycles, home appliances, and toys are just a mirage.
In the 1970s, Fed Chairman Arthur Burns rationalized successive jolts in prices for energy, food, mobile homes, children’s toys, women’s jewelry, and many other products that ultimately composed 65 percent of the consumer price index to keep his money mimeograph machine rolling. Anything to prop up the Nixon-Ford Administration.
After Paul Volcker vanquished inflation, political independence became the loadstar for western central bankers, but economic history is lost to one man with his eye on his future.
Mr. Powell comes up for reappointment soon. He can’t pull back his easy money policies and survive unless inflation imposes political pain on Mr. Biden greater than liberal Democrats’ pressure to create a European-style welfare state.
Facts be damned, Mr. Powell must enable the Democrats’ agenda before the Republicans have a chance to win back the House and Senate.
• Peter Morici is an economist and emeritus business professor at the University of Maryland and a national columnist.
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