Since publishing his inflation fighting plan a year ago on The Wall Street Journal editorial page, President Joe Biden continues to lose the economic fight. A review of his frameworks and proposed solutions reveal false confidence and unfulfilled assurances. The President gambled on the transitory inflation narrative, ballooned spending and lost. Here’s a report card of the results.
In his May 2022 op-ed, Biden described a bizarre world and economic environment very different from the reality portrayed by the facts and hard data the day he was sworn in. "In January 2021, when I took office, the recovery had stalled and Covid was out of control," wrote the President. In fact, in the first quarter of 2021, real GDP was already back to its pre-pandemic high of the fourth quarter of 2019. The economy had not stalled. Covid deaths dropped 80 percent in the two months after his inauguration--before any of Biden's programs were implemented.
Distinguished economists from prior Democratic administrations disagreed with Biden’s dire assessment. Larry Summers and Jason Furman offered warnings of a potentially powerful inflation impulse. Summers especially sounded the alarm on excess fiscal spending. Despite these admonitions, Biden pushed through a series of massive debt-financed government programs ranging from direct payments to households and local/ state governments to federal infrastructure along mostly partisan lines.
Biden refused to heed their warnings. His administration launched reckless spending initiatives in the midst of rising inflation and rapid FOMC rate rises. In Formula 1 racing this is called two-footed-driving: a technique of one foot on the gas and one foot on the brake at elevated speeds. The Fed's job has become more fraught as it uses aggressive monetary tightening to brake economic growth in the midst of pedal-to-the-metal fiscal stimulus. In the real economy, just as on the racetrack, such behavior causes permanent damage to the engine.
"We now have a chance to build on an historic recovery with an economy that works for working families." The President's year-old fanciful economic security goals have fallen victim to his administration's policy missteps. Since taking office, he has presided over a 3.3 percent decline in real average hourly earnings, the largest decline since records have been kept. Until last month, U.S. workers' real wages have been down every month since Biden became president. By contrast, real wages rose 4.1 percent in the year before Joe Biden came to office.
"Since I took office, families have increased their savings and have less debt." Americans' excess savings, especially those of the most vulnerable, have been eroded over the past year, while the trillions of dollars of new government debt remains. The President touted a year-end 2021 Federal Reserve survey showing a higher percentage of Americans feeling financially comfortable since the survey began in 2013. This survey has fallen a full five percent this year. The only other question on the survey, measuring American consumers' assessment of the financial well-being of the national economy, is down 67 percent since Biden took office. Unlike the President, the American people understand that the money transferred to their bank accounts is a liability of all citizens via increased federal borrowings.
President Biden then goes on to offer a discursive three-point plan for fighting the inflation he helped fuel, terming it "our top economic challenge right now."
First, the President clumsily asserted that "the Federal Reserve has a primary responsibility to control inflation." For years, Federal Reserve officials pleaded for increased fiscal stimulus to unburden monetary policy as the sole driver of economic growth. Now, the opposite is true--the White House needs to control fiscal outlays in conjunction with the Fed to get inflation under control, rather than act as an opposing force. One foot needs to come off the gas pedal.
"My predecessor demeaned the Fed, and past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won't do this." President Biden had already played backroom politics with Fed staffing in the summer and fall of 2021. The delayed official announcement of Fed Chair Jerome Powell's reappointment, the most belated of any Fed Chair thus far this century, hamstrung Powell's authority to begin reigning in an ultra-loose monetary policy regime. Precious months were lost. Earlier Fed hikes could have facilitated a lower terminal target Fed Funds rate, obviating the need for "higher for longer," policy rates, a new favorite FOMC phrase.
In February, Biden's chair of the National Economic Council, Brian Deese, left his position. Perhaps Deese's departure signals the failure of Biden's inflation fighting policies. His replacement, former Fed Vice Chair, Lael Brainard, was the rumored runner-up for Powell's job. The highly partisan Brainard should show restraint, maintaining Biden’s promise of the White House not disparaging her former colleagues. An unlikely but refreshingly effective position for Brainard would be a return to her roots in the Clinton administration, advocating for the responsible fiscal policies of the 1990s that led to a robust economic expansion, coupled with extraordinary levels of productivity growth. During this period, working class families fared well, markets soared and deficits were turned to surpluses. With Biden's approval ratings hitting the second lowest of his term this past week, she will be tempted to lobby for inflationary fiscal spending and less aggressive monetary tightening.
The President's second goal of "making things more affordable for families” has failed on multiple fronts. The Biden administration's most dangerous deficiency is its energy policy. By relenting on his anti-fossil fuel agenda, the President could structurally dent inflation, lower consumers' energy burden and enhance supply security. The price of oil is 35 percent higher than when Biden took office. U.S. crude production is down seven percent from pre-Covid levels and strategic reserves are at a 40-year low. The potential for another dynamic upward price shock has substantially grown under this administration.
A full-fledged housing affordability crisis, driven by the inflation-induced spike in mortgage rates, has crushed the American post-Covid longing for homeownership. One year ago the 30-year mortgage rate stood at 5.34 percent. This past Friday it was 7.19 percent. A recent troubling study by Deutsche Bank concludes that May 2023 is the worst time in the last 50 years to buy a home. Food banks across the country have reported long lines and usage levels rising as much as 40 percent this year. "Things" are clearly not getting more affordable.
Biden spectacularly botched his third stated goal “to keep reducing the federal deficit." He touted a short-lived $1.7 trillion deficit reduction projection. Budget figures since last Memorial Day have taken a startling turn for the worse. In just the first seven months of this fiscal year, the federal government ran a deficit of $925 billion. That is two and a half times as much as the same period the year before when it was only $360 billion. Revised CBO projections estimate that the deficit for this fiscal year will be 5.8 percent of GDP. This deficit will likely be a post-war record except during the worst of the Covid emergency. Alarmingly the CBO projects these same deficit levels over the coming five years. The President correctly stated that reigning in the deficit would reduce price pressures. Imprudently, he has ignored his own pronouncement.
With Memorial Day 2023 in the rearview mirror, President Biden should reflect that his past year's economic efforts have been a failure. He concluded last year's op-ed by pronouncing, "The economic policy choices that we make today will determine whether a sustained recovery that benefits all Americans is possible." Agreed. Sadly for the American people, he has failed them by not following his own deficit reduction proclamation. His ill-advised policies further imbedded inflation. Perhaps this past weekend's constructive debt ceiling extension compromise with House Speaker Kevin McCarthy reflects a begrudging awakening to responsible fiscal policies. Recent polls showing that ordinary citizens now link the President's deficit spending to continued inflation pressures surely influenced his negotiating stance. Biden should continue his pivot toward responsible fiscal policy. Politics, not the Ukraine war, continues to sustain elevated U.S. inflation. He and his new team should refocus on last year's deficit reduction objectives. In 18 months the American people will issue a final verdict on his success or failure.