DANIEL VAUGHAN: Biden, the Fed, inflation, and recession roulette

The flare-up between Fox News’ Peter Doocy and President Joe Biden is only the latest instance where Biden has insulted the Fox reporter. What triggered Biden’s ornery this time was what made it fascinating: Doocy asked, “Do you think inflation is a political liability?”

Biden deadpanned back, “No, it’s a great asset — more inflation. What a stupid son of a b***h.” Biden’s remarks were then duly reported in the official record, and we got that 24-hour story.

What’s notable about Biden’s comments is that it’s the first time anyone at the White House has publicly acknowledged that inflation is a problem. Remember, this is the same White House that spent the better part of last year denying inflation. Then, they shifted to promising they were monitoring the situation. Over Christmas, they started claiming to have magically saved the holidays for Americans because shipping issues weren’t a problem.

But with Doocy’s question, Biden bristled at the electoral implications. It’s an admission that inflation harms his White House and Democrats as a whole. For a White House that’s focused on the pure optics of inflation and no solutions, even denying that their spending plans languishing in Congress will increase inflation, Biden bristling and snapping at Doocy is the first honest moment they’ve had in a year.

Given that, it’s unquestionable that the Biden administration is putting pressure on the Federal Reserve to raise interest rates to attack inflation. That was the playbook employed by Paul Volker and the Federal Reserve in 1980. The belief is that this playbook will work again.

There are two questions that we have to ask from that, however. First, are we dealing with similar economic conditions that Volker had in 1980 that would allow interest rates to attack inflation? And second, how much political will is there in the Federal Reserve or the Biden White House to push raising rates if that game plan triggers a recession?

On the first question, the economic conditions between now and the 1970s share some similarities, but there are also some critical differences. The stagflation of the 1970s had the important characteristics of high inflation, high unemployment, skyrocketing oil prices, and low economic growth.

Currently, we share the problems of high inflation and increasing oil prices. On the other side, the United States is experiencing record level lows of employment and steady economic growth. The Wall Street Journal reported this past week that “[e]mployers spent 4% more on wages and benefits last year as workers received larger pay raises in a tight labor market.” The Journal added that most experts believed the U.S. labor market was near full employment because it had shrunk through the pandemic between retirements, deaths, and other factors.

None of these wage gains is enough to keep up with inflation pushing costs even higher, nor will cost of living increases to Social Security keep up with this kind of inflation. Additionally, demand for more employees and consumers’ desire to purchase goods and services, while abating somewhat, is still high.

We have a supply-side inflation problem. The United States doesn’t have enough employees, goods, or services to offer the market. Those shortages, and the supply-chain problems causing even more issues, create increased pressure on prices.

The Federal Reserve raising interest rates attacks the demand side of the economy. Maybe the Federal Reserve can raise interest rates enough to cause people and businesses to curtail spending and hiring. But even if they curtail economic demand somewhat, the underlying issues on the supply side will continue. Companies still need employees, and consumers still need to buy the basics currently missing in stores.

In the 1980s, when the Federal Reserve hiked interest rates, they triggered a double-dip recession. That reality cratered the administration of Jimmy Carter, giving America the rise of Ronald Reagan. And while Federal Reserve officials are signaling they’re willing to do whatever it takes to tackle inflation, reality may tell a different tale.

The political fallout will be seismic if the economy tanks into a recession under Joe Biden, with Americans still experiencing shortages and supply-chain issues.

Joe Biden may solve or dent some inflation while tanking the U.S. economy in the process. This would be devastating for an administration hyper-focused on optics, with little to offer on solutions. Biden is already underwater with approval polls, and he’d be on pace to be one of the worst presidents in U.S. history if he triggers a recession.

Biden would not know how to handle that situation. Reagan and conservatives jumped at the chance to kickstart the economy by enacting conservative economic reforms, the result of which was a massive economic boom that lasted decades. Biden’s only political trick will be rebranding Build Back Better, again, and claiming that it will solve inflation and a recession. When he first proposed the legislation, these two things weren’t on his radar.

All of this assumes, too, that raising rates will bring down inflation just like they did in the 1980s. That could happen. But our different economic conditions and political situation could also create a scenario where the Federal Reserve can’t do enough to tamp inflation, and we get the worst of both worlds: a recession and continuing inflation.

The point is, we don’t know. The more concerning part is that Biden doesn’t know, either. There’s little evidence he knows how to navigate these kinds of economic storms.

All of Biden’s failures so far have been of his creation. 2022 is giving him his first taste of events he has to navigate and respond to rapidly. Are we sure there’s a captain on that ship?

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