Breitbart Business Digest: The Vindication of the Bidenflation Thesis

How Biden’s Spending and Powell’s Fed Drove Our Inflation Catastrophe At the end of almost every Agatha Christie mystery, the great detective gathers the suspects together to reveal the identity of the killer. In Peril at End House, Hercule Poirot assembles the principal characters at a Cornish mansion to explain who was really behind a series of sinister events. The clues have been there all along. Now comes the moment when everything falls into place. We’ve reached that stage in the great inflation debate. Economists Domenico Giannone of Johns Hopkins University and Giorgio Primiceri of Northwestern University have arrived to play the role of Poirot. “Post-covid inflation was predominantly driven by unexpectedly strong demand forces,” they write in a new National Bureau of Economic Research working paper. “These demand forces reflected a combination of surprisingly robust pent-up demand following the pandemic restrictions, stronger-than-expected expansionary fiscal policies, and an unusually accommodative monetary stance.” In other words, the culprit was excessive demand, fueled by the Biden administration’s massive spending programs and the Jerome Powell Federal Reserve’s easy money. The much-demonized supply chains played a surprisingly small role in the worst inflation in four decades. The Evidence Was There All Along Giannone and Primiceri estimate that demand accounted for approximately 90 percent of the excess inflation experienced during the post-pandemic surge in both the United States and Europe. Supply shocks accounted for the remaining 10 percent. Even an alternative model attributes roughly three-quarters of the inflation surge to demand. Their research uses several sophisticated economic models, but the underlying logic is straightforward. When supply contracts, prices rise but economic activity weakens. When demand surges, both prices and economic activity rise. The post-pandemic economy experienced extraordinarily strong growth alongside soaring inflation. That points overwhelmingly toward demand. The researchers find that fiscal stimulus made an enormous contribution to inflation in early 2021, with the effects of successive rounds of pandemic spending pushing up prices. The Fed’s unusually accommodative monetary policy subsequently helped sustain inflationary pressures. Even the notorious supply-chain bottlenecks were partly consequences of excessive demand. American ports were processing record volumes of goods. They were being overwhelmed by consumers and businesses flush with purchasing power, much of it supplied by the Biden administration’s insistence on throwing nearly $2 trillion of additional deficit spending into an economy that was already recovering rapidly from the pandemic lockdowns. How the Experts Got It Backward For years, the conventional wisdom in economics and financial journalism was precisely the opposite. “The inflation has everything to do with the supply chain,” President Biden declared at a January 2022 news conference. The Federal Reserve famously insisted inflation would be “transitory” because it believed rising prices largely reflected temporary supply disruptions, perhaps amplified by pent-up demand from lockdowns. The New York Times repeatedly emphasized pandemic supply-chain disruptions as the explanation for the massive inflation afflicting the economy. On January 12, 2022, with inflation running at seven percent and economists openly debating the role of Biden’s stimulus, the Times published this remarkable headline: “Supply chain snags continued to drive up prices in December.” (Even the URL is a banger: “inflation-supply-chain.html.”) Those headlines were written by the editors of the paper. They were the equivalent of an editorial by the news section. And the newspaper’s business editors had decided that the supply-chain narrative was an established fact. Even articles acknowledging extraordinary consumer demand typically described it as “colliding” with constrained supply chains. The metaphor implied a kind of equality of causation that the new research decisively rejects. “Americans found themselves with a lot of money in the bank, and as they spent that money on goods, demand collided with a global supply chain that was too fragile to catch up,” Ana Swanson and Jeanna Smialek reported in the New York Times later that January. The emphasis was on the failure of supply chains to accommodate demand, rather than the extraordinary growth of demand itself. Fiscal and monetary policies were treated as aggravating circumstances rather than the underlying causes. “But a chorus of economists point to government policies as a big part of the reason U.S. inflation is at a 40-year high. While they agree that prices are rising as a result of shutdowns and supply chain woes, they say that America’s decision to flood the economy with stimulus money helped to send consumer spending into overdrive, exacerbating those global trends,” the Times reporters wrote. Paul Krugman was more explicit. In November 2021, the Times columnist rejected warnings from Larry Summers and Olivier Blanchard that the American Rescue Plan had overstimulated the economy. Demand wasn’t excessive, Krugman argued. Consumers were merely buying too many durable goods, overwhelming ports and warehouses. “A smaller Biden spending plan wouldn’t have made much difference,” Krugman insisted. Because inflation reflected bottlenecks rather than excessive overall spending, he argued, policymakers should have the courage to ride it out. Eventually, Krugman conceded that his inflation forecast had been wrong. But he still insisted that his assessment of the muted demand effects of government spending had been vindicated. The problem, he now maintained, was that the economy’s productive capacity had unexpectedly shrunk because people weren’t returning to work. It was the “Great Resignation” that was the real culprit. And you people were still causing inflation by buying too many video-enhanced stationary bicycles. The supply-chain explanation had mutated into a labor-supply explanation. Excessive government spending remained innocent. The Diagnosis Made the Disease Worse This wasn’t merely an academic error. The mistaken diagnosis helped perpetuate the inflation it purported to explain. If inflation was primarily the result of temporary supply disruptions, there was little reason for the Fed to restrain demand. Powell repeatedly argued that inflation would subside as bottlenecks cleared. The Fed kept interest rates near zero through March 2022, long after inflation had become unmistakable. The Biden administration likewise used the supply-chain explanation to deflect responsibility for its spending policies. The New York Times even suggested in September 2021 that worldwide inflation might be “good news” because its international character indicated temporary pandemic disruptions rather than national policy mistakes. Supply-demand mismatches, the newspaper explained, might have been amplified by stimulus spending, but they weren’t simply the consequence of individual countries’ policies and should eventually resolve themselves. This was a kind of just-so story that got things exactly backward by insisting that supply chain problems came first and then came excessive consumer demand that was just amplified by fiscal and monetary stimulus that followed. Even when contrary evidence arrived, the narrative-shapers refused to let go of the supply-chain narrative. In August 2022, the Times reported research finding that demand accounted for 60 percent of American inflation, compared with 40 percent for supply shocks. (Way too high of an estimate for the supply chain problem, it turns out.) Yet the article began by emphasizing that supply-chain bottlenecks and labor shortages had been major contributors, only subsequently acknowledging that surging demand had actually done more to raise prices. “Supply chain bottlenecks and labor shortages have been a major factor driving inflation in the United States, though surging consumer demand ultimately did more to drive up prices in the last two years, according to researchers at the Federal Reserve Bank of New York, the University of Maryland and Harvard University,” the New York Times reported. Apparently, even when demand was found guilty, the supply chains still deserved top billing. Not everyone bought the explanation. Even some establishment types saw through it. Harvard’s Jason Furman, former International Monetary Fund chief economist Olivier Blanchard, and former Treasury Secretary Larry Summers warned that excessive stimulus was overheating the economy. Steven Rattner, a former Obama administration Treasury official, wrote a February 2022 Times column titled “Biden Keeps Blaming the Supply Chain for Inflation. That’s Dishonest.” But the supply-chain myth survived long after inflation subsided. Just last month, Matthew Winkler, Bloomberg News’s founding editor and longtime editor-in-chief, casually attributed Biden-era price increases to pandemic-disrupted supply chains while celebrating Biden’s fiscal stimulus as an economic achievement. It was as if he couldn’t imagine a connection between the two things. For the uninitiated, Winkler is probably the most influential business journalist of the last four decades. The supply-chain explanation has become so deeply embedded in financial journalism that it no longer needs defending. It is simply assumed. “Most history is guessing, and the rest is prejudice,” Will and Ariel Durant wrote in The Lessons of History. When it comes to the Bidenflation era, financial journalism is just like that only with more guessing and more prejudice. The Vindication of Bidenflation Of course, not everyone got it wrong. We began warning about Bidenflation in the spring of 2021, arguing that excessive government spending and monetary accommodation were creating an inflationary disaster. We stuck with that explanation while much of the economic establishment insisted that inflation was transitory and supply-driven. Eventually, the Fed abandoned its transitory-inflation theory and began raising interest rates. But much of the financial press remains trapped in the supply-chain narrative. Others moved on to blaming corporate greed, price gouging, and a host of other supposed culprits that conveniently absolved fiscal and monetary policy. The supply-chain explanation was attractive because it exonerated the Biden administration’s deficit spending and the Fed’s accommodation of that spending. The diagnosis became part of the disease, and then became the preferred explanation for the damage the disease had done. Five years later, the evidence has delivered its verdict. The mystery of Bidenflation has been solved. And the culprit was Biden’s excessive deficits and the Fed’s excessively loose monetary policy.