A Recession To Save Democracy?

“Today’s report… demonstrates that we are making progress in slowing the rate of price increases,” Joe Biden said, commenting on another red-hot CPI print.

I suppose that depends on one’s definition of “progress.” Biden claimed December’s numbers showed “a meaningful reduction in headline inflation,” which is true if you go by the MoM print.

Depending on the context, it does make sense to put more emphasis on the monthly readings than the YoY numbers, but failing to at least nod to the highest annual print since Biden was forty years old came across as deliberately obtuse. And never mind the fact that the White House’s monthly “progress” still constituted a miss versus consensus (figure below).

Biden did acknowledge that the numbers show there’s “more work to do,” given that price increases are “still too high and squeezing family budgets.” Indeed, annual inflation is high enough to erode the entirety of workers’ wage gains — and then some. Food costs rose, and clothing prices jumped the most in nearly a year.

When it comes to swiftly rising consumer prices, public relations is extremely important. Inflation is, in part anyway, a psychological phenomenon, so it’s important that the messaging is effective. Short circuiting the expectations channel is key when it comes to preventing inflation from becoming entrenched.

The White House surely knew every media outlet in the country would run headlines touting the 7% YoY figure from December’s report. That Biden didn’t address that in his statement was a lapse, even as he was sure to address it at some point, as was Jen Psaki.

A dispassionate assessment finds me compelled to suggest that this White House has reached the point of diminishing returns when it comes to Biden’s editorializing around top-tier data releases via statements and press conferences. It’s really not that much different than Donald Trump live-blogging (and, in at least one infamous episode, front-running) the monthly jobs report, tweeting stock market updates to his followers like push notifications and conducting ad hoc foreign policy on Twitter.

It’s certainly understandable that Biden sees some utility in addressing economic issues at regular intervals considering the circumstances. Whereas Trump’s digital diary entries on the economy and stocks were little more than transparent displays of vanity, Biden is attempting to allay public angst at a critical juncture for the country. The problem is, he’s not doing a very good job of it, and it’s not usually for lack of sincerity, Wednesday’s deliberate omission of the 7% figure notwithstanding.

The juxtaposition between Biden’s “progress” and media headlines risked further undermining public confidence at a time when inflation is weighing heavily on his poll numbers with just months to go before the midterms. Biden’s approval rating was 43% at the end of 2021 (figure below), down dramatically from the 57% it reached when the American Rescue Plan was passed and the Delta wave hadn’t yet come ashore in America.

To be fair, the drop in his approval rating was directly related to America’s bungled exit from Afghanistan, but the highest inflation in a generation isn’t helping.

The White House variously insisted Build Back Better would actually help bring down inflation, but Joe Manchin made sure we won’t know anytime soon. Biden’s social spending plan remains in limbo. The GOP is keen to insist inflation is the product of economic mismanagement and that, were it not for Republican opposition to more spending, things would be materially worse.

The veracity of inflation claims made by Manchin and Republicans is questionable, at best, but it scarcely matters to voters who care only about their own personal economic circumstances. The reality for many is that wage gains, robust though they may be, simply aren’t keeping up with the pace of inflation.

You can be sure that party affiliation aside, Jerome Powell is extremely concerned about the prospect of inflation bringing Trump — or someone espousing Trumpism — back to power in the US. That’s surely a factor in the FOMC’s newfound zeal for tighter monetary policy.

Ultimately, there aren’t any good answers. Inflation, in its current manifestation, will have to resolve mostly on its own. Although price pressures continue to broaden out, the major issues still revolve around disruptions and frictions associated with the pandemic.

The question is: If inflation doesn’t resolve on its own, will the Fed be willing to do the only thing they can to wrestle it into submission? Namely, engineer across-the-board demand destruction via recession.

The cruel irony is that as politically damaging as that would be for the Biden White House, it might ultimately be necessary in order to prevent the onset of autocracy in 2024. Larry Summers’s predictions have been prescient over the past 12 months. In December, he warned Biden and Powell that “excessive inflation and a sense that it was not being controlled… risks bringing Donald Trump back to power.”

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10 thoughts on “A Recession To Save Democracy?

    1. They didn’t listen. And they never will. Or at least not centrist Democrats. Also, MMT isn’t a theory. It’s descriptive, not prescriptive. It just is. I’m not going to debate this with you or any other readers because it’s fruitless. MMT is a fact. It’s the way government finance works in advanced currency-issuing economies. The problem is that by calling it a “theory,” those who teach it condemned themselves to debating the subject with people who either refuse to admit the obvious, or don’t understand how government finance works. When you corner people on the self-evident facts, they resort to strawman arguments. That’s why I stopped debating it. It’s obvious you haven’t read Stephanie’s work, otherwise you wouldn’t have made this comment. It’s nonsensical. On multiple levels.

      1. Technically you’re right, they didn’t listen. And it is descriptive, so the next part of that description is to target inflation by raising taxes, right? I wonder how popular that will make the party in power? Not trying to be nonsensical, sorry!

        1. As ever, I recommend reading the actual literature before commenting. And this will be my final response on this article.

          1. I have the read the literature, but to directly quote Mrs Kelton, “So taxes are important, because they’re one way that the government can reduce the purchasing power of all the other spenders in the economy. So if the government wants to come in and do a big ambitious infrastructure project and spend trillions of dollars into the economy. It might be worried that spending trillions of dollars could push prices higher, could lead to inflationary pressure.
            And to offset or mitigate the inflationary pressure, it matches up some of its new spending with higher taxes. So it makes room for the government to be able to spend those dollars into the economy without creating inflationary pressures. Taxes are important because they allow government to pull a lever if it’s interested in rebalancing the distribution of wealth and income.” Source: https://www.macrovoices.com/guest-content/list-guest-transcripts/3912-2020-10-22-transcript-of-the-podcast-interview-between-erik-townsend-and-stephanie-kelton/file

          2. This is a reply to the comment below, by William:

            The citation you have is the answer to the question “And why is it a myth that it’s important to pay for what we spend or what the government spends through taxes?”

            It’s not the answer to the question William posed: “how to tame inflation?”

            MMT just explains why large deficits in governments with fiat currencies need not lead to inflation and what can be done with this power. It doesn’t say there will never be inflation or how to tackle this specific type.

            Within the MMT framework one could argue that spending to remove supply bottlenecks and keep people healthy and working throughout the supply chain (child care, health care), and engaging more workers (education, eviction prevention), the inflation we are seeing can be tamed.

            In that regard, Democrats are still listening to Dr. Kelton.

  1. H-Man, you stir up a hornet’s nest and then say your going to the sidelines. Joe has nightmare in front of him — raging inflation and rising interest rates going into the 2022 midterms. He needs a lot of luck that inflation will go in reverse and the Fed will not tap the brakes to hard. Right now it looks like a feeding frenzy for Republicans.

    1. Don’t hold your breath. Mid-term campaigns got underway on 1/6/21. What has been going on is a battle for hearts and minds that makes what we have tried to do in Vietnam, Iraq, Afghanistan, etc look like child’s play. Some folks have said we are already in a civil war and have been for some time. I agree It will be ugly and there will be many casualties. The key thing to remember is that there is no logic underlying the rhetoric or the actions involved. Any pretext, any lie can turn the tide. Fasten your seat belts.

  2. There’s a side to MMT that cannot be debated as to how government doesn’t need taxes to finance its expenditure.

    The other side, where the massive flaw resides, is based on the fact expenditure isn’t the end all be all. Oil cannot be printed, neither can railroads, food, containers or air/land/sea fleets. The naive application of MMT intervention, for lack of a better description, has caused the current inflation conundrum and putting the Federal Reserve between a rock and a hard place. Its ultimate downfall always was the stagflation scenario: tightening monetary policy and increased taxation to counter an exogenous inflationary shock.

    All models advocating for direct intervention aren’t robust to tail events. Complexity and non-ergodicity overwhelm every econometric model, as the Fed can very well attest to.

  3. Excessive inflation or a recession both bring back Trump, seems inevitable regardless of what path the Fed chooses, I personally can’t see how an engineered recession to tame inflation makes Biden or any Dem more electable, looks grim.

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