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Today’s inflation is a real concern⁠—it is running too high and is reducing households’ purchasing power. But linking fiscal policy decisions about the proper level of taxes and spending in the medium and long run to today’s inflation makes little sense. Even worse, many of these policymakers cast both the tax increases and the spending increases as potentially inflationary. This is not just unwise—it is simply economically innumerate.

In this post, we make the following points:

If one takes a longer-term perspective, however, a sustained economic depression could make war more likely by strengthening fascist or xenophobic political movements, fueling protectionism and hypernationalism, and making it more difficult for countries to reach mutually acceptable bargains with each other. The history of the 1930s shows where such trends can lead, although the economic effects of the Depression are hardly the only reason world politics took such a deadly turn in the 1930s. Nationalism, xenophobia, and authoritarian rule were making a comeback well before COVID-19 struck, but the economic misery now occurring in every corner of the world could intensify these trends and leave us in a more war-prone condition when fear of the virus has diminished.

But that is not the point. This time is different. As noted, the inflation surge comes at a time when financial and real estate asset values have been boosted to record and clearly unsustainable levels. That was not the case during previous great inflations.

As measured by the consumer price index, the annual rate of inflation in the US to October 2021 was 6.2 per cent. Annual inflation was running at 4.4 per cent in October in the European Union, and the UK’s Consumer Prices Index rose by 4.2 per cent in the 12 months to October.

Fitch Ratings-London-01 March 2022: Inflation challenges could start to threaten the global economic outlook this year, Fitch Ratings says in a new report. A scenario where US inflation remains very high in 2H22 and medium-term inflation expectations rise is plausible and could prompt much more abrupt Federal Reserve tightening than expected.

Core inflation is widely expected to fall in the US and Europe in 2H22 as consumer goods shortages moderate, pandemic constraints on labour supply fade and growth rates normalise. This should allow central banks to gradually normalise monetary policy, with limited impacts on growth. Fitch expects the Fed to raise interest rates by 100bp in 2022 and a further 100bp in 2023, the Bank of England (BOE) to hike rates by a further 75bp this year and 50bp in 2023, with the ECB increasing rates by 20bp next year.

In an effort to tame rising inflation, the Fed has raised interest rates five times already this year, starting with a 25 basis point hike in March and a 50 basis point hike in May. Of these five hikes, two 75 basis point hikes were announced in the third quarter, most recently on Sept. 21, per Forbes Advisor.

As a new month of trading kicked off Tuesday, the Fed also began its November meeting, which is expected to bring a fourth consecutive 75 basis point interest rate hike, according to CNBC. Stocks “tumbled” amid the new reports and anticipation of more rate hikes, said the outlet.

By now the impacts of supply chain disruption are becoming all too familiar: shortages, inflation, factory closures, goods waiting at ports to be unloaded. All these impacts are serious enough, but another more-hidden concern lurks just beneath the surface: the impact of supply chain failure on national security, broadly defined as a nation's ability to protect and ensure the well-being of its population.

This definition of “national security” is broader than just the defense industry or military-related efforts; it also could encompass the very ability of a nation to ensure economic well-being, public health, and protection of a nation's key infrastructure. Supply chain disruptions cause general economic disruption and key commodity shortages, which then in turn can, in fact, drive aggressive national behavior and international instability. And ironically, this reactive aggressive national behavior can happen even if the health of a national economy itself depends upon continued international economic interdependence. Indeed, this very interdependence can create vulnerabilities. So a systematic effort, cutting across agencies and public and private sectors, could be one way to ensure these vulnerabilities are understood and mitigated.

[Robert E. Scott, and Adam S. Hersh, "Tariff increases did not cause inflation, and their removal would undermine domestic supply chains," Economic Policy Institute, 1-19-2022, https://www.epi.org/blog/tariff-increases-did-not-cause-inflation-and-their-removal-would-undermine-domestic-supply-chains/]

The pronounced inflation uptick in 2021 has attracted enormous attention from both the media and policymakers. While it would be better for working families if inflation were lower, by far the biggest danger this episode poses is the prospect that policymakers will overreact, prescribing a cure that is worse than the disease. One obvious example of a policy overreaction would be a swing toward more-contractionary monetary and fiscal policy, most notably an increase in interest rates.

(Ami, "A bad nuclear deal with Iran would be disastrous," Washington Post, 2-13-22, https://www.washingtonpost.com/opinions/2022/02/13/bad-nuclear-deal-with-iran-would-be-disastrous/, edited for ableist language)

The Feb. 6 editorial “Buying time, though not a lot” rationalized that any nuclear deal with Iran would be better than no deal. The opposite is true. A bad deal is likely to advance Iran ever closer to a nuclear weapon. A credible threat to Israel’s survivability will unquestionably bring about an Israeli preemptive strike on Iran’s nuclear facilities and other installations to paralyze response, no matter the consequences, in keeping with Israeli’s survivability doctrine as amply demonstrated since its reestablishment in 1948. Israel is not about to sit idly by when facing an existential threat. No nation can or will. That would engulf the Middle East in a major war, possibly spreading well beyond the region and ensnaring the major world powers. This is an outcome nobody wants.

[Ilan Berman, "Inflation Gives Biden an Incentive for a Bad Iran Deal," WSJ, 1-19-2022, https://www.wsj.com/articles/inflation-gives-biden-an-incentive-for-a-bad-iran-deal-oil-nuclear-energy-prices-inflation-jcpoa-2015-sullivan-11642603586, accessed 2-13-2022]

Inflation Gives Biden an Incentive for a Bad Iran Deal

Without a financial lifeboat, a prolonged economic and fiscal crisis will make fragile states even more fragile.

The ability of governments to spend their way to recovery is considerably strained; highly indebted regimes must confront the difficult choice of servicing debt payments or scaling up spending on social services like health care, infrastructure, and education, with most nations forced to reduce investments in services just as they’re needed most. Diminished spending on services results in widening inequality, declining trust in government, and further erosion of the social contract. With more than three-quarters of the population classified as “extremely poor” in fragile states, the potential for new waves of civil resistance, insecurity—and repression—is considerable.

Several think tanks — including the Center on Budget and Policy Priorities (CBPP), Levy Economics Institute (LEI), PolicyLink, and the Center for American Progress — have proposed job guarantee plans. While there are minor differences between them, each essentially contemplates a massive, government-run program to provide work (at a predetermined wage) and benefits to enrollees on demand. Currently, individuals in the job market "sell" their labor to firms as much as firms "purchase" labor. Mutually, this transaction — employment — arises because both the employee and employer benefit; value is recognized reciprocally. With a federal jobs guarantee program, the government is inserted between the employee and the employer; the value proposition is limited at best. Centralized plans such as these forgo the most fundamental elements of markets — information, competition, and incentives — in favor of rote bureaucratic reckoning. A Daunting Task Simply finding work for tens of millions of job guarantee enrollees would be a formidable task; finding productive, impactful work catering to an individual's skills, in a given locality and in a timely manner, would be staggeringly difficult — if possible at all. The costs, too, are daunting. Both the CBPP and LEI reports project costs ranging from $450 billion to more than $600 billion, which put the proposed programs in the same league with the Pentagon in terms of discretionary spending. And while it is true that the cost of any of the federal jobs guarantee programs would be offset by savings in current unemployment insurance and poverty mitigation programs, neither of the estimates include costs of designing, staffing, and managing the proposed agency. In terms of potential enrollees, estimates start at roughly 10 million. According to LEI's high-end estimate of 17.5 million enrollees, the program would have more employees than the combined head count of the U.S. Department of Defense, the Chinese People's Liberation Army, Walmart, McDonalds, the U.K.'s National Health Service, the China National Petroleum Corporation, the State Grid Corporation of China, the Indian Railways, and the Indian Armed forces. A government organization of that size — 17.5 million job guaranteed individuals, with an untold number of administrators, managers, and other employees to attend to them nationwide — would become the largest public or private organization in history. It would also be the largest experiment in organizational efficiency in history, with the livelihoods of millions of newly government-dependent citizens hanging in the balance. Wage Inflation Another issue is the wage, which several plans recommend should be (or average) $15 per hour. With the increasing focus on "living wages," it will not be long before program directors discover that $15 per hour goes far further in Alabama than Hawaii, and the tendency will be to equalize cost-of-living disparities up, further increasing already massive costs. Two other factors: both the CBPP and LEI plans fail to account for the potential disruption to existing businesses — mostly small businesses, the engine of economic growth in the United States — which will inevitably occur when workers earning less than $15 per hour leave their private sector jobs for higher-paying employment with job guarantee placement. At present, more than 40 million Americans earn less than the proposed guarantee wage of $15 per hour, which could trigger a major shift of the U.S. workforce away from private employment, on to public rolls. It would also effectively force small businesses to compete directly against the federal government on the labor market. Prone To Fraud Finally, a government operation as colossal as a federal jobs guarantee program would inevitably be vulnerable to both political corruption and private rent seeking. As proposed — and however well-intentioned — the federal jobs guarantee program would cost more in two years than the entire New Deal did (in 2018 dollars). Rejecting these proposals does not mean turning a blind eye toward the plight of the under- or unemployed. There is a vastly better way: not only far less costly, but more consistent with traditional American values and respectful of the full potential that unemployed, underemployed, and employers offer. We must allow labor markets to work without the fetters of artificial controls such as minimum wages, restrictive licensing, coercive collective bargaining agreements and others, thereby permitting market signals to allocate labor to their greatest possible social benefit.

First element is based on the assumption that the marginal tax rate on income above a certain threshold would increase what would have a negative substitution effect for people with higher earnings. In this case, a basic income scheme would have a negative effect not only on the supply of labour of people with higher earnings but also on their incentives to work hard and to keep educating and acquiring more skills (Ibid. 177). It can cause lack of workers with the ambition to be promoted and with a certain level of skills required for the position. A second element refers to the income effect. If people’s priority is to achieve and to maintain a certain level of income, once they receive a basic income their incentive to increase their level of income would be reduced, if their income is within a range in which the increase in income tax falls short (Ibid.). 25

Thereafter, people’s behaviour largely influences the economic sustainability of a basic income scheme. For example, there is the issue of immigration and emigration. Whether a basic income is implemented at the municipality level or at the country level, it does not avoid the issue of the opportunistic exit of net contributors to the basic income and the opportunistic entry of net beneficiaries from a basic income (Van Parijs 2013: 178). This problem also would not be caused simply by income differentials. There are other social factors that would affect people’s decision to stay or to immigrate, or to emigrate. It is the economists’ and sociologists’ job to research the appropriate approaches to a basic income that would address people’s concerns about economic unsustainability.

In the interim, the profits of energy and food purveyors are soaring as they keep raising prices faster than their costs. Rising interest rates will not solve the production shortages that enable these rage-inducing price increases.

Jerome Powell — perhaps inspired by Solomon — decided to split the baby.

In his news conference after the Fed raised its Fed Funds rate by three-quarters of a percentage point, he said that the Fed might raise rates by half a percentage point in December but could keep raising interest rates above the 5% “terminal rate” the Fed had set in September, according to the .

(“IMF warns of ‘hard landing’ for global economy if inflation persists,” pg online @ //um-ef)

The IMF has warned of a “hard landing” for the global economy if persistently troublesome inflation keeps interest rates higher for longer and amplifies financial risks. Although the fund left its overall economic forecasts largely unchanged from January in its latest World Economic Outlook, published on Tuesday, it stressed that signs of resilience alongside lower global energy and food prices masked a darker reality. Pierre-Olivier Gourinchas, the IMF’s chief economist, said: “Below the surface . . . turbulence is building, and the situation is quite fragile.” “Inflation is much stickier than anticipated even a few months ago,” he said. “More worrisome is that the sharp [monetary] policy tightening of the past 12 months is starting to have serious side effects for the financial sector.” In its twice-yearly full forecasts published on Tuesday, the IMF said the turmoil in the UK government bond market last autumn and the US banking turbulence last month showed the “significant vulnerabilities [that] exist both among banks and non-bank financial institutions”.

Business capital investment spending is composed of private spending on nonresidential structures (e.g., factories), equipment (e.g., machinery), and intellectual property products (e.g., software). Business investment is a key determinant of economic growth. When businesses add to the capital stock, the value of goods and services (i.e., gross domestic product [GDP]) the economy can produce increases. One reason that economic growth has been lower in the last decade is because business investment spending has grown more slowly. Boosting investment spending was one of the key goals of the 2017 tax cuts.

The Slowdown

For example, a 2017 study projected that radically restricting U.S. energy development (including halting new natural gas and oil leases, banning hydraulic fracturing, prohibiting new or expanded coal mines and prohibiting energy infrastructure permits) could cost 5.9 million jobs and $11.8 trillion in cumulative GDP by 2040. Even accounting for “green” job creation, such restrictions would return the U.S. to recession-level unemployment rates of over 7%. A frank reckoning of the Democrats’ energy proposals has been absent through two rounds of presidential debates. The threat of climate change is real, and we need solutions that realistically address it. This means taking on the dual challenge of lowering energy-related emissions while meeting our country’s need for affordable and reliable energy. We can do both – increased use of natural gas is the chief reason U.S. energy-related carbon dioxide emissions are at their lowest levels in a generation – yet you’d never know it from the debate stage. Quite the opposite. Support for green new deal-like concepts is this season’s political litmus test on climate action, with many of the Democratic presidential contenders backing the “keep it in the ground” concept. Sen. Elizabeth Warren’s Green Industrial Mobilization, Sen. Kamala Harris’ Climate Equity Act, and Gov. Jay Inslee’s Climate Mission Agenda are just some of the green new deals to surface this cycle. They could have significant impacts on these areas of everyday life, now supported by our current energy portfolio: Affordable Household Electricity: Abundant and affordable natural gas, made possible by the shale revolution, has contributed to lower heating costs for American families. This is an especially important consideration for low- and fixed-income households because energy affects livelihoods, and during the winter months inexpensive access to heat reduces exposure to the life-threatening cold. The regional energy shortages resulting from infrastructure moratoriums impacting New York and New England serve as a warning of what a radical climate plan could mean. Plus, the proposals would require retrofitting existing buildings and infrastructure that currently depend on natural gas and oil, upgrades that could cost upward of $500 billion. Government Revenue for Education and Infrastructure: In 2018, revenues generated by U.S. energy production in federal areas totaled $8.93 billion – money that’s redistributed to states and communities for education, infrastructure and conservation projects. Eliminating natural gas and oil production could mean cutting the tax base that funds services that matter most to average Americans, such as public schools, roads and first responders. Transportation without Unfair Subsidies: Electric vehicles (EVs) – and their subsidies – already disproportionately benefit upper-income households at the expense of other taxpayers, and their market viability is still to be determined. Currently, EVs are more costly than conventional vehicles, and they don’t necessarily meet individual consumer or commercial cargo needs. And, aside from the obvious fact that the energy must come from somewhere – and renewables only generated 17% of U.S. electricity in 2018 – battery production presents another roadblock to universal EV uptake. Reliance on foreign countries, including Russia and China, for the mineral components in EV batteries could reverse progress toward lowering energy imports, threatening the U.S. economy. Millions of Jobs in the Natural Gas and Oil Industry: The natural gas and oil industry supports 10.3 million well-paying jobs, creating STEM-related opportunities for veterans, women and minorities, and contributing $1.3 trillion to the U.S. economy. While green new deal proposals often promise economic safety nets for the energy workforce, the reality of job replacement programs is much less clear.

Some have suggested that the study provides evidence for the view that replacing for-profit private health insurance with administratively efficient single-payer insurance will enable more people to receive better benefits for less money. That is incorrect or, at best, an incomplete interpretation. Per above, my study found instead that the potential administrative efficiencies of M4A could only save much less than the induced additional service utilization would cost. It is not the single-payer system itself, but rather cutting payments to hospitals, doctors and nurses that would produce a scenario showing lower national health spending. Without those payment cuts, projections for M4A show not only dramatically higher federal costs but higher national costs as well. Moreover, even with such payment cuts assumed, we still couldn’t say that Americans would get better benefits for less money under M4A, because we simply do not know how many providers would continue to provide services once their income is cut so sharply.

A primary effect of M4A would be to replace private spending on healthcare with government spending financed by federal taxpayers. Americans would pay for no deductibles or cost-sharing, but they would pay much higher taxes. This change dwarfs any projected changes in national health spending, which in turn are a highly contingent, unpredictable function of whether and how deeply provider payments are cut. The observation that Americans are already paying for most of these expenses, while technically true, by itself glosses over the important question of whether they are willing to have their taxes raised sufficiently to have the government pay for them.

An analogy might help frame the choice. Suppose, for example, that a government representative came to your door and said, “We’ve totaled up all the money you spend each year on food. We think you’re wasting money paying for restaurants’, groceries’, and farms’ costs of doing business, as well as others in the food industry. We think we can do this more efficiently. So we’re going to raise your taxes by that amount of money, and we’ll provide all your food to you for free. And we’ll also be able to take care of those Americans who don’t have enough access to food. We’re planning to cut all payments to restaurants, groceries, farms and other food providers by about 40%, and if we do that we might be able to cut 3-4% off of your total food bill.” Would Americans take this deal?

According to analysis by the Penn Wharton Budget Model (PWBM), Medicare for all (M4A) could shrink U.S. GDP by as much as 24% by the year 2060, depending on how it is financed.

Despite this hit to economic growth, the plan proposed by presidential candidate Bernie Sanders (I-VT) isn’t without benefits. According to the analysis, Medicare for all would improve population health overall, increasing life expectancy by roughly two years, grow the population of the United States by 3%, and boost worker productivity. The share of the population that is “seriously ill” would also decline, from 15% to 13%.