The inflationary puzzle of the White House

One year away from the midterm elections that could end Democratic control of Congress, soaring prices for goods – from clothes to cars – have clearly alarmed business leaders and ordinary Americans. As prominent economists from both parties are issuing warning signals, a Marist poll last month for NPR and PBS NewsHour showed that inflation has outpaced wages and unemployment as the main public concern regarding the American economy.

The resulting cascade of questions for White House officials gives a three-part answer, but not the one that allayed concerns that the 5.4% increase in the consumer price index in June had been renewed this week. This is the largest year-over-year increase since 2008.

First, Biden economists say, they are watching inflation closely and taking targeted action in response. Second, much of the problem will subside before long as the bumpy reopening of the economy following the pandemic shutdowns eases. And third, talk to Federal Reserve Chairman Jerome Powell, the independent monetary policy official who echoed the White House in downplaying the threat of inflation as almost certainly a temporary phenomenon.

“It’s primarily the Fed’s job, and they treat it primarily like the Fed’s job,” says Harvard economist Jason Furman, former senior economic adviser to President Barack Obama.

“But neither are we sitting idly by,” said Jared Bernstein, a member of Biden’s White House Council of Economic Advisers who also served in the Obama administration. “We’re doing, not just a lot, but more than I’ve even seen in this space.”

An administrative task force is working with private companies to ease supply chain bottlenecks that drive up the prices of cars and other consumer goods. It includes efforts to speed up the movement of shipping containers through U.S. ports and to speed up semiconductor chip manufacturing.

White House officials are also working with members of both parties in Congress on the semiconductor shortage. Legislation pending on Capitol Hill includes $ 52 billion in domestic production incentives.

The pressure to do more

Outside critics, including Furman’s former White House colleague Larry Summers, have urged Biden to do more. And while the current administration includes more liberal economists who despise Summers’ views, they haven’t ruled him out entirely.

For example, amid complaints that improving federal unemployment benefits increased labor costs by preventing Americans from returning to work, Summers urged Biden to signal that he would not seek to extend them. beyond their September 6 expiration. The president then pointed it out.

But the administration has avoided other measures that could make a difference on the sidelines.

Summers, who had argued that the US $ 1.9 trillion bailout was irresponsible in size, urged the administration to slow its remaining spending to reduce inflationary pressures. Biden’s celebration on Thursday of new monthly child tax credit checks of up to $ 300 – which outweighs the impact of the price hike on the millions of households that receive them – demonstrated how unattractive this is for the White House.

Likewise, the White House has not slowed down the distribution of state and local aid from the bailout even though this aid often exceeds the loss of revenue it was supposed to compensate. With the public also alarmed by the increase in crime, the administration told mayors the money could be used to hire police officers.

Reducing existing tariffs to curb price increases could throw away the diplomatic influence the United States wants to preserve for foreign policy purposes. And another step Summers advocated – getting Biden to sound stronger public warnings to deter expectations of future inflation – poses the greatest risk of all.

Biden’s top priority is his massive $ 4 trillion plan to improve America’s economic future through infrastructure investments and support for struggling families. Republicans and some moderate Democrats have warned that this could speed the return to inflation levels that weighed on the US economy a generation ago.

Since spending under the program would be spread over years, White House economists consider this concern to be unfounded. But highlighting a potential problem they see as temporary could have the effect of eroding support for Biden’s long-term goal the most.

Additionally, administration economists say infrastructure legislation itself would help ease inflationary pressures in areas such as housing. It includes significant investments for the construction and rehabilitation of housing which would expand the supply.

While waiting for Congress to act, White House economists find a strengthening of their views in two key inflation indicators. Powell told the Senate Banking Committee on Thursday that long-term inflation expectations remained “well anchored” around the Fed’s 2% target. And 10-year Treasury bond yields have fallen since the spring, signaling investors with billions at stake are not yet concerned about a surge in long-term inflation.

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