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America’s Inflation Crisis: Who Is To Blame?

Joe Biden
US President Joe Biden. Image Credit: Joe Biden Facebook Page.

According to an old saying, success has a hundred fathers but failure is an orphan. This certainly seems to be the case with the recent surge in inflation. While both the Biden Administration and the Federal Reserve are eager to take full credit for the strong output and employment rebound following 2020’s pandemic-induced economic recession, they keep insisting that inflation’s unwelcome reappearance had little to do with economic policy and was due to factors entirely beyond their control.

To be sure, the Administration and the Fed have had more than their share of bad luck when it comes to inflation. The persistence of the pandemic had the effect of causing domestic labor market shortages and of keeping the global supply chain disrupted. Meanwhile, serious problems at electronic chip manufacturers abroad dealt a harsh blow to the automobile and appliance industry while the move to green energy caused international oil prices to spike.

All of these factors had a serious impact on supply. However, the key point that the Administration and the Fed continuously downplay is that inflation is mainly the result of aggregate demand exceeds aggregate supply. And when it comes to aggregate demand, there is certainly a lot that both the Administration and the Fed did that led to a situation where there was excess demand in relation to supply.

Indeed, if ever budget policy has been conducted with so little regard to the risk of economic overheating and inflation it has to be that of the Biden Administration over the past year. In March 2021, at a time when the US economy was already recovering strongly from the pandemic, President Biden rushed through Congress a $1.9 trillion budget stimulus package.

Coming on top of $3 trillion in 2020 bipartisan budget stimulus measures, the Biden stimulus meant that over the past two years the economy received cumulative budget stimulus of more than 20 percent of GDP. With the gap between what the economy could produce at full employment and what it was actually producing being only around 3 percent of GDP at the start of last year, the wonder is not that we got inflation as Larry Summers warned we would get from the excessive budget stimulus. It is that inflation did not accelerate at a faster rate than it did.

Over the past year, the Fed also cast caution to the wind when it came to running inflation risks. At a time when the country was receiving its largest peacetime budget stimulus on record, in its wisdom, the Fed chose to keep its pedal fully to the monetary policy metal as inflation proved to be anything but transitory.

Not only did the Fed keep policy interest rates at their zero bound thereby allowing them to become negative in inflation-adjusted terms. It also continued to buy $120 billion a month in US Treasury bonds and mortgage-backed securities. Those purchases had the effect of adding further froth to the US equity and housing market bubbles.

The net upshot is that consumer price inflation is now running at 7 percent and showing little sign of deceleration. This will leave the Fed with little option but to slam on the monetary policy brakes soon in order to get the inflation genie back into the bottle. That in turn risks bursting today’s equity and housing market bubbles which could very well lead to a hard economic landing later this year.

Among the more surprising aspects of President Biden’s irresponsible budget policy is how little regard was paid to the electoral cycle. Had attention been paid to that cycle, the Administration would not have created the conditions for an economic boom in 2021 to be followed by an economic bust in the run-up to the November 2022 mid-term Congressional elections.

Dr. Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.

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Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and multilateral lending agencies.

2 Comments

2 Comments

  1. Slack

    January 19, 2022 at 6:45 pm

    Inflation is caused by GREED and SHORTAGE, but currently, US inflation is caused by GREED. Although not too long ago, there wassa shortage of coins which allowed some unscrupulous people to withhold change, thus upping inflation.

    Biden must stop fooling around and begin grabbing the bull by the horns. Sack the fed chairman and sec of state and stop yodeling for ww3 in Europe for once.

  2. jopocop

    January 19, 2022 at 10:02 pm

    Biden and the Democrats know that inflation is intrinsically created by too much money chasing after supplies. Lip service by Biden and the Democrats is zilch to stop inflation which operates like the laws of gravity. A key ignored factor is when the govt acts or omits to act to restrict fissile fuels, with rising prices, that trickles into ratcheting inflation. Food in grocery stores is based upon oil being plentiful and low cost from the farm to store shelves. When USA harbors are clogged up, such as LA/Long Beach, that interferes greatly with the supply chain. Biden was never educated or versed with economics, and such is ignorant about the solutions. Lawyers, like Biden, are horrible at economics or abiding by generally established principles. Lawyers play politics, rather than truly acting with sound rules of economics.

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