I frequently wonder if people in major media outlets are reading my work. It’s gratifying when somebody with a much larger megaphone than mine echoes points I’ve made in an earlier post. That’s the case in William Galston’s latest column in the Wall Street Journal:
There are risks on both sides. After the 2007-09 recession ended, premature fiscal restraint slowed the recovery and consigned too many workers to extended unemployment that could have been averted. On the other hand, if inflation rises faster and longer than expected, the Federal Reserve may feel compelled to raise interest rates, which will put pressure on households, the federal budget and the job market.
Because inflation has been on a downward course for most of the past four decades, an entire generation of citizens and experts haven’t experienced its ravages and can barely imagine a world of rapid price rises. This would make its recurrence even more disruptive.
Amid this uncertainty, public officials have to make choices—and doing nothing is itself a choice. Prudence suggests some rules of thumb. One is to imagine the worst case—an inflation surge that forces policy makers to slam on the brake—and try to minimize its likelihood by gradually reducing fiscal and monetary stimulus as the economy rebounds. Betting everything on the option that promises the largest reward can be a winning strategy for poker players and entrepreneurs, but rarely for a country.
Another prudent policy is to develop detailed contingency plans in case things go wrong. Although improvising under pressure can work, organizations that often confront crises—police, firefighters and the military—strive mightily to avoid it. Policy makers should do the same.
That conclusion is the mitigation plan I wrote about earlier. That’s harder than it may sound because an effective mitigation plan would go against every instinct of the Biden Administration, economic as well as political. When problems are being caused by the rapid infusion of cash into the system, you can’t change that by infusing more cash into the system.
More crucially, a mitigation plan also goes against every instinct of Speaker Pelosi, Majority Leader Schumer, Budget committee chair Sanders, Budget chairman Yarmuth.
As for the Fed, I suspect Powell is serving his last few months so responsibility for any plans are for the next chair.