POWELL SPEAKS AND THE VOICE OF THE DOVE IS HEARD IN OUR LAND
It is the best of times, it is the worst of times in the American economy, to open on an original note. The economy is booming in this best of times. The unemployment rate is low and falling, some ten million jobs await workers, wages are rising, manufacturing production is now 2 percent above pre-Covid levels, consumers are spending (+18.2 percent over last November), Christmas is upon us. An estimated 109.5 million Americans are preparing to travel over the holiday period, notwithstanding the outbreak of a new highly transmissible variant of the Covid virus, the worst effects of which boosted vaccination shots seem able to repel.
The nation remains angrily divided in this worst of times. Democrats in congress are filing criminal charges against leading Trumpkins, including the leader of the Republican Party in the House, while millions of Republicans are preparing to back candidates in the 2022 mid-term elections who back Trump’s plan to run in 2024 for what he calls his third term. Workers are unhappy in their jobs, and, in what is called the “Great Resignation”, huge numbers are advising their bosses to take their jobs and, well, look for applicants. Others are refusing to come to the office on a regular basis – in New York City only eight percent of workers show up five days a week despite a city-wide 9.4 percent unemployment rate that should have them attentive to employers’ wishes.
Many consumers will do without goods they ordered from Asia as the number of ships waiting for West Coast berths continues to grow. Crime is on the rise, with murder rates soaring and large gangs looting swanky shops, while in many cities fierce debates rage over whether to defund or refund the police. Culture wars over religion, abortion, racism, and masking/vaccination mandates have Americans on edge – as millions happily head for family gatherings to consume pricier-than-ever hams and turkeys. Optimism rears its lovely American head.
Most of all, on the “worst of times” side of the national ledger, we have inflation, the silent thief that is robbing workers of their wage increases and forcing heads of households to prowl supermarket aisles in search of cheaper substitutes for the goods they usually buy.
Inflation is rising at its fastest rate in 39 years. The Consumer Price Index rose 6.7 percent in November from the same month a year ago, the sixth straight month in which it rose faster than 5 percent. The Producer Price Index, which measures wholesale prices, rose 9.6 percent last month, the largest gain on record, presaging future jumps at the retail level. House prices have jumped 14 percent in the year ending in the third quarter, 87 percent of cars are selling at or above sticker prices, and food prices are up more than 5 percent and headed higher in 2022.
Seemingly run-away inflation is among the most important factors driving down President Biden’s popularity ratings – only 44 percent of Americans approve of the way he is doing his job, 50 percent disapprove. The President continues to press for passage of his Build Back Better (BBB) plan to move America into line with the welfare states of Europe’s social democracies. He puts the cost at $1.75 trillion over the ten-year budget period, denies he would be tossing gasoline onto the inflation fires by passing BBB, and says it will not add to the deficit. But Biden is including only the early-year costs of programs that will certainly be renewed when they expire, as Bernie Sanders has assured his pouting followers. Until we learn to budget separately for long-lived investments and current expenses, this budgetary flim-flam will continue.
The Congressional Budget Office, which vice president Biden called the “gold standard” when it comes to deficit estimates, isn’t buying the application of that bit of legerdemain to the nation’s ledgers. But let’s not be churlish. If Republican Richard Nixon can be pardoned for taking America off the gold standard that backed the dollar, surely Democrat Joe Biden can be forgiven for taking our budget process off the CBO’s gold standard.
The CBO reckons BBB will add $3 trillion to the deficit over the ten-year period. Fears of just such a spilling of red ink contributed to senator Joe Manchin’s continued resistance to the plan, and forced postponement of final senate consideration until after the new year.
Larry Summers served as treasury secretary to Bill Clinton and is an adviser who warned the Biden team of impending inflation. He says, “The idea that inflation will revert soon to levels anywhere near the Fed’s [2 percent] target looks like a long shot.” Probably right. Wage increases are not likely to be rolled back. Indeed, businesses are budgeting for at least a 4 percent increase next year, and the militance of the workforce – union elections in Starbucks, rejection by members of wage increases accepted by union leaders, return of cost-of-living-adjustment clauses (COLAs) to union contracts – suggests the bosses are underestimating what is in store for them in 2022. Rent rises are surely now embedded in the economy. Rising material costs ensure that housing prices are more rather than less likely to continue elevating.
Add rising service fees: barbers will raise the prices they charge for a trim, although perhaps not by the 15 percent which lawyers have already managed to wrest from their clients. Hotel rates are rising, as are car rental fees.
The plan laid out by Fed chairman Jay Powell, who has replaced “transitory” with “persistent” in his description of inflation, last week will do little to shorten Summers’ long odds. In the jargon of the trade, it leaves the Fed “behind the curve” in its efforts to contain inflation.
The Fed will not halt asset purchases that keep interest rates low, but will instead continue those purchases, although “tapering” them by $30 billion monthly, rather than $15 billion announced earlier. That will bring the purchases to an end in March instead of June, meanwhile continuing to stimulate the already-inflation-hit economy.
The Fed’s policy team also talked the talk about raising interest rates to fight inflation but did not walk the walk. Twelve of the eighteen Fed monetary policy makers expect three interest rate increases next year, taking its benchmark rate to 0.9 percent, negative in real terms. That, say the Fed’s forecasters, will drive down the current inflation rate (using the Fed’s preferred measure) of 5.3 percent to 2.6 percent next year.
Powell & Co. seem to believe that tiny interest rate increases to a level that is still negative in real terms can contain inflation in an economy that is growing at 4 percent, with low unemployment (3.5 percent) and still beset by bottlenecks. “Nice work if you can get it”, to borrow from lyricist Ira Gershwin, but as he added, “if you get it, won’t you tell me how?”