When a Democratic president loses the New York Times and Jimmy Carter’s economic advisers, well … hoo boy. “Inflation fighting comes first,” says Carter’s Treasury Secretary, who apparently got dumped for taking that approach in 1979. Michael Blumenthal isn’t alone among the surviving Carter administration officials telling the NYT that this looks a lot like malaise to them all over again:
Mr. Blumenthal said Mr. Biden should heed the lessons of Mr. Carter’s failed attempts to curb inflation by avoiding measures that are counterproductive. He urged Mr. Biden to support a substantial interest rate increase and to abandon his sweeping legislative package in favor of deficit reduction, which some economists argue could dampen prices by slowing growth depending on how it is approached.
“Inflation fighting comes first,” said Mr. Blumenthal, who escaped Nazi Germany and lived in Shanghai during a period of hyperinflation in the 1940s. “He has to show the recognition to the public that inflation has lasting deleterious effects on the economy and that by trying to take half measures now, you merely prolong the pain of these effects.”
The problem isn’t just inflation, but what’s fueling it — almost literally. Biden has adopted an energy policy and combativeness with producers very similar to that adopted by Carter, who wanted to curtail domestic fossil-fuel production to appease environmentalists at that time too. Another old hand from Treasury warns now that Biden’s about to get the same economic and political outcome — a supply crisis that will only make matters worse:
Some of the proposals for easing the pain of inflation on Americans, such as the gas tax holiday or student loan debt forgiveness, have been dismissed by economists who say they might make inflation worse. Others have been criticized, like Mr. Biden’s upcoming trip to Saudi Arabia, which some have called pandering to a state that the president once likened to a “pariah” over its role in the assassination of Jamal Khashoggi, a Washington Post columnist and a prominent dissident. Mr. Biden said last week that he would not ask the Saudis to increase oil production.
C. Fred Bergsten, the assistant secretary for international affairs at the Treasury Department from 1977 to 1981, said the United States should avoid the kind of domestic oil price controls that were in place during the 1970s and that the Carter administration eventually abandoned in 1979. Describing them as an “abysmal failure,” Mr. Bergsten said they distorted energy markets.
“One lesson from the Carter administration is don’t do that,” Mr. Bergsten, 81, said. “Energy price controls discourage production and held down the supply side over time.”
And yet another Carter adviser, Barry Bosworth, skewered a talking point from Biden. The former head of Carter’s “Wage Price Council” (a bad idea phased out by Ronald Reagan in 1981) blames the current inflationary wave not on Vladimir Putin but on Biden’s pet stimulus program, the $1.9 trillion American Rescue Plan. The only way now for Biden to get inflation under control is to constrict federal spending and push the Fed to get more aggressive on interest rate hikes:
It is apparent to Mr. Bosworth that the $1.9 trillion pandemic aid package that Democrats passed in 2021 has fueled inflation. Now, he said, it will be largely up to the Federal Reserve to corral it.
“It clearly turned out to be excessive,” Mr. Bosworth said. “The amount of transfer funds that we poured into the economy over a short period of time clearly added to inflation.”
What has been Biden’s response to inflation and the energy supply crisis largely driving it? Demonize gas station owners and oil companies, continue to restrict opportunities to expand domestic supply and especially refining capacity, and talk about what an opportunity this is for an “incredible transition.” It’s as if Biden didn’t just echo Carter’s infamous “malaise speech” just once, but wants to make malaise a running theme of his presidency.
It’s not just Carter’s old advisers who are warning that Biden’s jumped the tracks on inflation and the economy. With the Fed the last resort on inflation, thanks in large part to Biden’s refusal to move off of his zero-fossil-fuel policy targets, everyone’s hitting the political bunkers in the Beltway for the recession that will surely arrive at some point when the interest rates finally hit the trigger:
Fed Chair Jerome Powell has begun saying the quiet part out loud: The central bank is willing to tolerate a recession if it means getting inflation under control. “The bigger mistake to make,” he said on June 29, “would be to fail to restore price stability.”
While Biden has publicly backed Powell’s efforts, raising expectations of a recession are compounding the administration’s economic woes as Democrats head into congressional elections this year.
“Everyone is screaming about inflation,” said Josh Bivens, research director at the left-leaning Economic Policy Institute. But “people would really hate a recession too.” …
Dana Peterson, the chief economist at The Conference Board, a business research group, said she anticipates a “brief yet shallow” recession starting in the last three months of the year. But other factors could worsen the situation: if housing prices start to take a nosedive or if the war in Ukraine intensifies, sending oil and food prices even higher. She also said her forecast assumes some of the infrastructure spending enacted last year will begin bolstering the economy, cushioning a slowdown.
“If we don’t see that, we could see a deeper and more prolonged recession,” she said at a POLITICO “Women Rule” event.
Michael Feroli, the chief U.S. economist at JPMorgan Chase, said a downturn could even start as soon as this quarter, with recent data showing that consumer spending — the biggest driver of GDP — is beginning to slow.
“Things are looking like we’re losing altitude pretty quickly,” he said.
We’re still a ways off from a recession, my friend and fellow NARN host King Banaian explains, but it’s looking more and more possible:
The cost of goods and services have been on the rise due to inflation for the past 6 months. King Banaian is the Dean, School of Public Affairs and Economics professor at St. Cloud State. He says with an unemployment rate below 4% and prices rising because people can afford to spend more, he has a hard time believing we’re going to have a recession anytime soon. Banaian says it is possible we could see a recession 6 months from now but signs aren’t pointing to a recession in the immediate future.
Banaian says largely people still have money after delaying travel during the pandemic and the government stimulus dollars that came in over the past couple of years. He says it is possible the Fed won’t raise interest rates more than they have already based on how the market has responded. Banaian says based on this evidence if we go into a recession that it won’t be that bad compared to other recessions we’ve had in the past. He says he certainly doesn’t think it will be like the one we had in 2008.
He continued the conversation on Twitter this morning:
I would need 3 of 4 of those to turn down for three months running to decide a recession had begun. That hasn’t happened yet.
— King Banaian (@banaianshow) July 5, 2022
He’s right about the status quo, but the longer Biden refuses to budge on spending and energy, the worse this gets. Biden’s following a Jimmy Carter playbook that even its co-authors now warn is a bad plan. They should know, and that status quo may not hold much longer either.