Biden tries Wishcraft to banish inflation


The pageant that unfolded on the White House Act on Tuesday is perhaps destined to be the iconic scene of Joe Biden’s presidency.

The president’s aides had held a celebration of the Cut Inflation Act on the day the Labor Department’s statistics office would release its Consumer Price Index (CPI) report for August. . Not only would the president be there with senior officials from his party, but thousands of supporters were also invited to toast the expected victory over inflation and submit to a serenade from James Taylor.

President Biden had actually signed the law nearly a month prior, shortly after it was approved in party votes in the House and Senate. The decision to hold the rally on the same day as the consumer price index was released was intended to project the image that the legislation was already working. Administration economists expected the Bureau of Labor Statistics (BLS) to report that prices actually fell in August. The day was chosen to become a symbol of the administration’s policy of inflation, which ironically it has become.

President Joe Biden and Vice President Kamala Harris arrive on the South Lawn of the White House for a Cut Inflation Act celebration on Sept. 13, 2022. (Nathan Posner/Anadolu Agency via Getty Images)

President Joe Biden speaks during a Cut Inflation Act celebration Sept. 13, 2022, on the South Lawn of the White House. (AP Photo/Andrew Harnik)

Speaker Joe Biden, Vice President Kamala Harris, First Lady and Second Gentleman, Speaker of the House Nancy Pelosi (D-CA) and Senate Majority Leader Chuck Schumer (D-NY) wave to the crowd on the South Lawn of the White House during a celebration of the Cut Inflation Act on Sept. 13, 2022. (Nathan Posner/Anadolu Agency via Getty Images)

The Inflation Reduction Act, of course, has virtually nothing to do with reducing inflation. It authorizes about $400 billion in new spending and tax incentives aimed at reducing fossil fuel emissions, and it extends Obamacare insurance subsidies that were set to expire. There are tax increases on large corporations that are supposed to pay for expenses and more. In a few years, it will allegedly reduce deficits by collecting more taxes than it spends, thanks in part to a super enforcement team at the Internal Revenue Service. Many economists agree that, all things being equal, this could eventually put downward pressure on inflation.

Of course, all other things are not equal. Even before a month has passed, the Biden administration announced a student debt cancellation plan that would add more to the budget deficit almost immediately than the $300 billion that the Cut Inflation Act promised to subtract over the next decade. Two other bills the president signed into law recently — one increasing benefits for veterans exposed to toxic combustion fireplaces and the other subsidizing domestic semiconductor manufacturing — are expected to add $357 billion. additional to the deficit.

We point this out not to be rude, but because it shows just how far off the mark the White House had already been when it called its bill on climate change, corporate taxes and the ‘Obamacare’ Inflation Reduction Act. The combined effect of pressure from the Biden administration to pass legislation has been to increase the budget deficit and increase inflationary pressures. But instead of accepting victory and moving beyond the deception embodied in the legislation’s title, the administration doubled down on timing Tuesday’s inflation rally.

The White House must have thought it was too late to cancel the celebration after the BLS reported that inflation had not come down in August. It had accelerated. In fact, it had picked up a lot of speed once you looked past the drop in gas prices. Moreover, wages would once again have lagged behind prices, indicating that workers had lost their purchasing power. As we reported yesterday, Biden held a Cut Inflation Act celebration despite news that inflation had cut the rest of us down.

So the nation watched as the president celebrated “an extraordinary story being written in America today” as figures showing the stock market was having its worst day since the initial calamity of the pandemic paraded along the bottom of the chart. screen. James Taylor provided a fitting soundtrack to this absurd scene, singing about his friend’s suicide, heroin addiction, and time in a mental hospital. We saw fire and rain at the same time. This scene we suspect is destined to be the epitome of Biden’s presidency.

Financial news is broadcast on television as traders work on the floor of the New York Stock Exchange on September 13, 2022 in New York City. The Dow fell more than 1,200 points after an inflation report showed prices rose more than expected over the past month. (Michael M. Santiago/Getty Images)

Singer James Taylor performs on the South Lawn of the White House during a Cut Inflation Act celebration on Sept. 13, 2022. (Nathan Posner/Anadolu Agency via Getty Images)

We used the expression wishes in the past to describe the preferred public policy position of the Biden administration. Time and time again, the administration has acted as if it believed it could twist reality by saying the right combination of words, like the children in JK Rowling’s novels. The White House inflation rally was like a huge wishes festival, with the president’s entire cabal chanting that they had won a great victory over inflation.

Wall Street had also expected inflation to decline in August. The consensus was for headline inflation to fall by one tenth of a percentage point and core inflation to gain three tenths. Instead, headline inflation Pink tenths of a point and the core jumped six tenths of a point. Note that Wall Street has now underestimated the CPI in 11 of the past 18 months. Only twice in all that time has the CPI surprised on the downside. According to calculations by Ethan Harris of Bank of America, the cumulative “net surprise” meant that inflation is 2.3 percentage points above what Wall Street had expected.

Why has Wall Street so systematically underestimated inflation? One reason may be geography. Over the past year, the BLS National Inflation Index has pushed prices up an average of 8.3%. The index for the greater New York area, however, rose only 6.6%. In July, prices in the New York area fell 0.3% while national index prices were flat. In other words, Wall Street may be underestimating inflation because there is so much less inflation where Wall Street economists live.

Another reason is that many economists have not adapted to the idea that we are now in a regime of high inflation. Their models are still tied to the decades of low inflation that preceded the pandemic. Many of them became convinced that accommodative monetary policy no longer had the power to raise inflation, even if combined with fiscal stimulus. They viewed the Phillips curve as flat, meaning there was no real trade-off between low unemployment and low inflation. Only severe supply shocks could lead to sustained inflation. So when inflation hit, they decided it was a supply problem that would be quickly resolved. Inflation, almost by definition, had to be transient.

We are not optimistic about the mental agility of economists after the August inflationary shock. Unfortunately, it may be some time before economists recognize that the current inflation crisis is largely the result of too large a spending deficit accommodated by too loose monetary policy. The wisdom of such an outmoded notion may one day prevail. But when that day will come, we cannot say.



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