President Joe Biden’s budget deficits threaten to ignite the kind of inflation that followed the Vietnam War and Great Society, and Federal Reserve Chairman Jerome Powell appears content to enable him.
The president inherited most pieces for a robust recovery.
The $4 trillion in COVID relief enacted through December closed the gap between aggregate demand and potential GDP in February to $380 billion. Ignoring warnings about the potential to overheat the economy, the March American Rescue Plan sent state governments, small businesses, the unemployed and others $1.9 trillion in additional stimulus—five times the output gap.
Demand outstripping supply
Powell has been telling us that inflation expectations in financial markets are not building but that only indicates he’s persuaded bond buyers, not business leaders or consumers, who are bidding up prices for homes and everyday items.
Components associated with the reopening of the economy—for example, car rentals, lodging, airfares and restaurants—accounted for about half of the recent jump in the consumer price index. But during the Great Inflation of the 1970s, Fed Chairman Arthur Burns discounted jumps in a succession of items as temporary or one-offs until finally, it was conceded high inflation was a permanent feature of the landscape.
Suppose Biden stuck $100 vouchers—printed by Powell—for takeout food under the windshield wipers of every car parked in Ocean City, Md., every week during the summer season. Do you suppose the prices for hamburgers and pizza at the seaside resort would rocket?