Peter Morici: Powell and Biden are rolling the dice on inflation and growth
Fed Chairman Jerome Powell and President Joe Biden are rolling the dice on runaway inflation and slow growth.
Global supply-chain disruptions and cost pressures on businesses are likely to persist into 2023 but by merely phasing down purchases of Treasury and mortgage-backed securities, the Fed is still adding significant liquidity. Delaying until mid-2023 raising interest rates keeps money cheap for speculation.
“The Fed will be under enormous pressure to print more money and let inflation solve the federal government’s funding problems.”
The delta variant, climate-change-related events and Evergrande’s woes have slowed the recovery here and in China, and pumping more liquidity into the system doesn’t create new chipmaking capacity or ease labor shortages. But cheap credit and excessive liquidity help push up home prices 20% a year, juice the stock market
and generally create too much money chasing too few goods.
This creates dangerous asset bubbles and torpedoes affordability for younger folks. Around faster growing cities, that imposes higher wage demands on growing businesses trying to recruit talent.
Many business leaders sense surging labor, and material cost pressures are becoming structural—not transitory. Building those expectations into annual business plans would create self-sustaining wage-price spirals.
GDP growth and inflation importantly depend on labor force and productivity growth. During the 2010s, those grew at a respectable pace and President Donald Trump’s program of lower taxes and deregulation accomplished 2.5% growth.
We can’t do much about the near-term growth of the native-born working-age population, but our immigration policy is in shambles. The border is hemorrhaging with low-skilled asylum seekers who will be looking for employment in industries where opportunities are shrinking. Hybrid office-home work arrangements and automation are permanently destroying jobs at restaurants, retailers, dry cleaners and the like.
Biden is sternly opposed to sealing the southern border and reorienting immigration by giving priority to skilled workers that would boost growth and productivity, rather than those who would potentially place new burdens on social welfare programs.
Wasting capital seems to be a preoccupation in Washington these days. Keeping short-term rates near zero and the benchmark 10-year Treasury well below 2% boosts record junk bonds sales and multiplies the number of zombie companies—businesses whose revenues don’t cover labor and material costs plus interest payments.
As the Fed normalizes interest rates, these companies will be unable to roll over debt and face bankruptcy. A 2% jump in mortgage interest rates could easily pierce the housing bubble. The combination could hold the Fed hostage to reverse course on phasing out bond purchases and block the normalization of interest rates.
Curtailing domestic petroleum production won’t enable ordinary households to buy electric cars at a faster clip. The build-out of EVs can only happen at the pace that science brings down the cost of batteries and reduces charging time. Beyond adequately funding research, extra federal money won’t yield much and would be spent better elsewhere.
Biden wants to bias federal subsidies for EV purchases toward union-made vehicles. Unfortunately, GM’s
offerings pose a fire hazard if parked in garages, and Ford’s
EVs are less inspiring than Tesla’s
Placating the UAW merely threatens public safety and wastes capital by moving resources from more innovative to less-competent businesses.
Subsidizing the pace of investment in green technology will drive down wind, solar and battery costs more quickly, but benefits to economywide productivity and growth would be greater if markets were left to distribute capital to its optimal allocation between green industries and other activities.
Once the economy fully recovers from the pandemic, the Fed and Administration are both forecasting sub-2% trend growth. That’s quite a step down from the Trump record and an admission that their polices are slowing either labor force or productivity growth.
The massive reconciliation package will likely be scaled back but much of that will be accomplished by early expiration dates for new and continued programs like the child tax credit and other expanded entitlements. Paid for with new revenues over 10 years, those will result in larger federal deficits over the next few years.
Economists that advise Biden suggest the Fed should set its inflation target significantly greater than 2% to better support growth.
The hyperinflation of the 1970s indicates otherwise, but that’s how you put lipstick on a pig.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.