Boom or Bust?

I agree with the editors of the Washington Post:

A reasonable case can be made — eminent economists such as Lawrence H. Summers have made it — that President Biden’s $1.9 trillion American Rescue Plan was too large and too late, putting an already recovering economy at risk of overheating. But the new inflation numbers don’t yet prove it. First, the price increases they reflect are relative to an anomalously low baseline: April 2020, when the U.S. economy was essentially paralyzed. Second, the headline consumer price index includes volatile sectors such as food and energy. Without those, the rise in “core” inflation was tamer. As for the labor market, in which the number of job openings, 8.2 million, now roughly equals the job shortfall relative to pre-pandemic times, some workers are clearly staying on the sidelines because $300 federal unemployment insurance supplements deter them from seeking service-sector positions. Mr. Biden was wrong to dismiss that concern in remarks Tuesday; yet he was surely right to note that other issues, such as a lack of child care and lingering fear of contracting the coronavirus, are also depressing labor supply.

but I disagree with their conclusion:

This is no time for anyone to cling dogmatically to prior beliefs. That goes for the administration’s critics but also for the administration itself, and for the Fed. Robust growth coupled with tolerable inflation remains the likeliest scenario for 2021, and a month or two of bad data would not suggest otherwise. If the data changes, however, policymakers must be ready to change, too.

One data point doth not a trend make but the data points are beginning to accumulate. The difference between a “risk” and an “issue” is that a risk is something that may happen while an issue is something that has already happened. The way you deal with risks is by putting mitigation plans into force. I think the risks are considerably higher than the editors apparently do and once it has become an issue it could already be too late. Where’s the mitigation plan? When “doubling down” on fiscal stimulus actually heightens the risk, it’s not a mitigation plan.

1 comment… add one
  • Drew Link

    Over time the way the CPI is calculated has changed. Today’s 4% would have been 8% in the nineties and 11% in the late 70’s.

    I’m sure people will come out in defense of the changes. But notice how its a one-way deal? I have no doubt that inflating its way out of the national debt is a key part of the strategy. It may help explain the attraction of over-valued equities.

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