Category Archives: Spending

Inflation and the Biden Budget

It is good that the Biden administration is beginning to take inflation seriously. However, there isn’t much that the president and Congress can do about it. Inflation has to do with the money supply, which is the Federal Reserve’s territory. The Biden administration’s tranche of trillion-dollar deficit spending bills will likely contribute a percentage point or so to the inflation rate for the next several years. That is small potatoes compared to the Fed’s runaway money creation, which is responsible for most of the rest of today’s 7.9 percent inflation rate. At least as far as inflation goes, those bills have not been catastrophic. But they have made the Fed’s job more difficult.

Congress and President Biden can make the Fed’s job easier by undoing some of that spending and restraining themselves going forward. President Biden’s proposed budget would not do that.

Its headline item, a 20 percent minimum income tax on the very wealthiest of taxpayers, would likely have no detectable effect on inflation. It would have a small impact on the deficit, while not addressing overspending, which is the deficit’s root cause. Its negative impact on investment would harm economic growth. This would actually increase inflation, though in this case the effect would likely be too small to be detectable.

There is one area where the Biden administration can have some positive effect on inflation. Economic growth is deflationary, an underappreciated fact. The money supply is currently growing faster than economic output—that’s inflation by definition. The goal is to have them grow at the same rate.

There are two ways to do this. One is to slow money supply growth to get it closer to economic output growth, which the Fed is starting to do. The other is to grow the economy faster, so it better matches that fast-growing money supply. Both sides of the equation matter.

Fed policy remains the most powerful inflation-fighting instrument; fiscal policy from the elected branches doesn’t even come close. But economic growth can help fight inflation, too—besides being good for its own sake.

Congress and the Biden administration should loosen never-needed occupational licenses, trade barriers, energy restrictions, financial regulations, permits, and excessive paperwork. The resulting increase in growth would help to ease inflation. It would not be an inflation cure-all. But an extra percentage point or two of growth would make the Fed’s job easier at the margin. More importantly, more growth would save and improve lives.

The COMPETES Act Is a Bad Idea. Here’s What Congress Should Do Instead

The 2,912-page America COMPETES Act (H.R. 4521; the backronym is for ‘‘America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength’’) is the latest in a series of spending bills intended to spark the economic recovery from the COVID-19 crisis and revive America’s manufacturing sector. The problem with this is that unemployment is down to 3.9 percent. GDP grew 5.7 percent last year, and has already made up the ground it lost at the height of the pandemic. Manufacturing output is already higher than it was when COVID hit, and is near the all-time record high set in 2018.

So that rationale is a no-go. But the COMPETES Act has another purpose: To counter China. The Chinese people are our friends, but the government in Beijing is not. President Xi Jinping’s consistent illiberalism is harming the Chinese people and China’s neighbors and trading partners.

The COMPETES Act seeks to counter Beijing’s illiberalism by imitating it. This is the same “but they do it, too” argument the Trump administration used to justify its trade war. The COMPETES Act’s copycat policies include tens of billions of dollars of corporate subsidies, stricter control of capital flows, and centrally planned innovation. Imitation is the sincerest form of flattery, which is why the American economy would be best served if Congress scrapped the COMPETES Act altogether.

Seen in this light, perhaps it is a good thing that much of the COMPETES Act’s text is a mish-mash of competition-unrelated wish-list items and campaign-season pork. These include coral research, climate change initiatives, and union organizing efforts. Of course, these are also bad policies.

But there are plenty of things Congress should do instead:

  • Give the Federal Reserve the independence it needs to get inflation under control. It can do this by keeping out political activist appointees.
  • There are currently  more than 1 million federal regulatory restrictions that cost the economy nearly $2 trillion per year. These badly need to be addressed via structural reforms.
  • The national debt just hit $30 trillion, nearly a third more than America’s entire GDP. Congress should spend less.
  • Tariffs are clogging supply chains and raising prices on hundreds of billions of dollars of goods, above and beyond what inflation is doing. Congress and President Biden could lift most of these burdens immediately if they wanted to.
  • Nearly a quarter of jobs now require some kind of occupational license, up from about 1/20th of jobs 60 years ago. These licenses are often economic protectionism, and block opportunities for millions of workers and thousands of businesses.

These are all areas where Congress can help American businesses become more competitive and have real accomplishments to show off.

It is not enough to simply oppose bad bills such as the America COMPETES Act. Reformers should also have a positive agenda. In addition to the ideas listed above, my colleague Wayne Crews has his own list over at Forbes, and there is also the latest edition of CEI’s Agenda for Congress.

In the News: The America COMPETES Act

I’m quoted, though inaccurately, in a Voice of America article on the America COMPETES Act:

Ryan Young, a senior fellow with the Competitive Enterprise Institute, told VOA that efforts by Congress to mimic China by trying to manipulate the U.S. economy are “misguided” at best, and at worst destructive.

“This falls into what I think of as the ‘But they do it, too,’ argument,” Young said. While it is indisputable that the Chinese government creates all sorts of advantages for certain sectors within its economy, he said, it doesn’t follow that the answer is for the U.S. to do the same.

Despite government support, large Chinese tech firms are burdened with substantial debt, operational inefficiencies and political meddling, he said.

Further, Young noted that the semiconductor industry, which the legislative efforts target above all else, has already taken steps to bring some of its production into U.S. territory, with chip giant Intel expanding a $50 billion complex of chip manufacturing facilities in Arizona.

I should have been more clear in explaining to the reporter that subsidies are harmful, even in China. Subsidized companies grow soft and dependent, and tend to operate with politics in mind, rather than customers or investors. The result is waste, corruption, and white elephants, along with slower innovation. The more subsidies in an economy, the less competitive it becomes, especially in the long run. Congress should not copy China’s mistakes.

The whole article is here.

Senate Shelves Build Back Better Spending Bill, For Now

The Senate will not vote on the Build Back Better (BBB) spending bill this year, though they might take it up again next year. It does not have 50 votes without Sen. Joe Manchin’s (D-WV) support, which appears not to be forthcoming. This is a good thing for two reasons. One is inflation. The other is that Gross Domestic Product (GDP) and unemployment numbers are well on their way to pre-pandemic levels. A stimulus bill was never needed in the first place. There are policies Congress and state governments should pursue, but more deficit spending is not one of them.

Monetary policy has a much bigger effect on inflation than does fiscal policy, such as stimulus bills. Even so, Build Back Better would likely have added between a quarter and a half a percentage point of inflation on top of what we are seeing now. And it might have lasted for a decade or more, depending on how many of its temporary spending programs would have later been made permanent.

Considering that the Federal Reserve has traditionally targeted 2 percent inflation, BBB would have eaten up a big chunk of its usual inflation “budget.” Inflation is currently at 6.8 percent, the highest since 1982. The Federal Reserve today announced it would taper money supply growth. It will slow down a bond purchasing program and end it altogether in March, and will likely enact a series of up to three interest rate increases during 2022.

Since money supply growth is inflation’s biggest component, high inflation will be with us well into 2022, no matter what Congress does. But BBB-caused inflation on top of that would have made a bad problem even worse.

Manchin, and likely other Senate Democrats, may realize this is not a good look going into the midterm elections. President Jimmy Carter made important accomplishments in trucking and airline deregulation, and he appointed Paul Volcker as Federal Reserve chair, who ultimately slowed down the monetary printing press. But in the popular mind, Carter’s legacy is stagflation. If President Biden wants to avoid sharing Carter’s legacy, he should be quietly happy that his signature legislation is now on ice. He should see to it that it stays that way.

Biden should also avoid interfering with the Fed as it works to taper down today’s inflation. Since inflation can spark a temporary boom, politicians have always been tempted to put pressure on the Fed to goose the numbers a little leading into an election. (Lyndon Johnson and Richard Nixon were particularly egregious in this regard, as Peter J. Boettke, Alexander William Salter, and Daniel J. Smith argue in their book Money and the Rule of Law.) But the tradeoff of an inflationary boom now is a bust later.

There is no guarantee that Congress and President Biden will learn the right lesson. When inflation’s temporary stimulus effect wears off, policy makers are tempted to reach for the bottle again, rather than risk a hangover recession and hurt their chances for another term in office. This short-term thinking is what led to the 1970s stagflation. Had the process continued longer than it did, the result could have been Argentina-esque. It is crucial that today, Congress and President Biden respect the Fed’s nominal independence.

Fortunately, inflation is unpopular with the public. And economic fundamentals are in reasonably good shape, which means there is no need for inflationary stimulus. People hunkered down when COVID-19 hit, and are opening up when they feel safe—and when regulations allow them to. We aren’t through it yet, and it’s too early to tell how much effect the omicron variant will have. But the COVID recession had no stock market crash, no financial crisis, no housing bubble, no savings and loan scandal, or any other underlying economic illness. Traditional Keynesian stimulus does not apply to today’s economy. Build Back Better might be the biggest example of a #NeverNeeded policy yet.

The best thing that can be said about Build Back Better is that it was fighting the last battle, not the current one. Less charitably, Build Back Better was essentially a Democratic version of the PATRIOT Act, in which policy makers used a crisis as an excuse to put a bunch of longstanding wish-list items into a bill, and then market it as a must-pass crisis response. Not only would BBB have increased inflation, it would have used up more than $1 trillion dollars of resources that almost certainly have better uses than paying political favors—most of them COVID-unrelated.

GDP is already back to where it would have been had COVID never happened. Today’s ultra-low 4.2 percent unemployment rate looks better than it is, because many people are staying out of workforce, either for safety reasons or because they are content living off of savings for a little while longer. But even accounting for that, employment is in decent shape, and labor force participation is trending back to pre-COVID levels. Job openings are there for the taking—though rapid inflation is making it difficult for employers and employees to figure out fair wage rates.

Congress will instead turn its attention to other issues, such as voting rights. But it turns out there are policies Congress can pursue to fight inflation from the supply side. Money is growing faster than goods and services, causing higher prices. Removing regulatory obstacles to making goods and services will help to bring money and goods back into balance.

President Trump doubled tariffs, and President Biden is pursuing nearly identical trade policies. Scrapping those barriers alone would help unclog supply networks while lowering prices on hundreds of billions of dollars’ worth of goods, from big items like cars and houses to children’s toys and clothing.

There is no good reason for truckers to have a minimum age of 21 during a shortage when there are 18-year-olds perfectly able to do the job well.

U.S. ports operate at roughly half the efficiency of more modern ports like Rotterdam, which is open 24/7 and is heavily automated. While there isn’t much Congress can do about this, the biggest obstacle here are labor union contracts. These need to be modernized to avoid another supply network crisis and keep the U.S. shipping industry up to global standards. However, Congress can repeal the 1920 Jones Act, which attempts to protect the U.S. shipping industry but instead has reduced it to an uncompetitive rump of its former self.

Similar Buy American-style regulations requiring U.S.-flagged ships to dredge U.S. ports are why many ports are badly behind on dredging projects, and are unable to host many modern container ships.

Over a quarter of U.S. jobs now require some sort of occupational license from the government. Sixty years ago, it was 5 percent. Federal, state, and local governments need to get rid of unnecessary licenses that prevent willing people from creating more goods and services. Besides being the right thing to do, it would help to fight inflation.

None of these policies has the attention-grabbing cachet of a trillion-dollar piece of legislation. But unlike the BBB, they would stimulate new economic growth and help get inflation back under control.

Thankful for Good Economic News on Jobs, Consumer Spending: More to Do

This statement originally appeared on cei.org.

During Thanksgiving week, jobless claims dipped to 199,000, their lowest level in 52 years, when the country’s population was less than two thirds of what it is today. October consumer spending grew 1.3 percent, leading to optimism about a strong holiday season. CEI senior fellow Ryan Young comments:

“It’s nice to have two bits of good news going into Thanksgiving. Jobless claims are back below 2019’s pre-COVID levels, and consumer spending increased in October enough for retailers to expect a healthy holiday season. This provides more evidence that the economy is mostly healthy, but for COVID. The more we beat back the disease with vaccines, the more people feel safe opening up. Washington’s big spending bills, which won’t begin spending money in earnest until next year, were never needed in the first place.

“There are still notes of caution. Inflation remains high, and all that deficit spending will likely make it a few tenths of a percentage point worse for several years going forward. This will make the Fed’s inflation-fighting job even more difficult. It is also possible that October’s big consumer spending increase was a reaction to clogged supply networks. People may be doing their holiday shopping early in anticipation of longer shipping times and possible shortages. To the extent this is the case, people aren’t necessarily spending more, they’re just spending earlier. In the meantime, Congress and President Biden can help by spending less, and removing trade barriers and regulatory sludge that are distorting supply networks and clogging ports.”

Statement on Reconciliation Bill

Several of my colleagues and I issued statements about the reconciliation bill Congress is currently considering. The full statement is here. My contribution is also below:

Senior Fellow Ryan Young said:

“There are two reasons for passing the infrastructure and reconciliation spending bills: fighting COVID and helping the economic recovery. They fail on both counts. Congress should turn to other policies instead. These include speeding up the FDA’s approval process for medical treatments, and lifting regulations, tariffs, permits, and licenses that are sludging up supply networks.

“Federal regulations currently cost more than $14,000 per household. Lightening that load by as little as ten percent would be an enormous stimulus that requires no new deficit spending.

“Most of the 1,684 page reconciliation bill consists of COVID-unrelated wishlist items such as more than $14 billion for forest restoration; $50 million for water research; $1 billion for antitrust enforcement; and billions of dollars in subsidies for private businesses with the right political connections.

“Because all that money has to come from somewhere else, stimulus is at best a zero-sum game. The spending bills are not creating new wealth, they are reshuffling existing wealth. Since funding is decided by politics rather than merit, the bills are almost certainly a net loss to the economy, even compared to doing nothing.

“The spending bills will use up nearly $3 trillion in capital that instead could have helped struggling businesses take loans to stay afloat or grow; that could have gone towards adapting supply networks to post-COVID conditions; and that people could have invested in themselves to improve their future prospects.”

September Inflation Remains High and Fixable

Inflation remains high, with September’s numbers coming in at a 5.4 percent annualized rate, the highest number in a decade. The Federal Reserve’s target is 2 percent. While this is not a return to Carter-era stagflation, it is cause for concern. The economic recovery is difficult enough as it is, and high inflation only makes it harder. Inflation not only means higher prices for consumers, it means higher input prices for businesses, and is contributing to supply chain difficulties. That means consumers are facing price increases due to supply-and-demand factors, in addition to inflation.

Inflation is what happens when the amount of money circulating in the economy grows faster than the amount of goods and services. Keeping inflation in check means keeping those numbers in sync. Today’s record deficit spending is pushing them apart, by increasing monetary flows without necessarily increasing the amount of wealth being created. The upcoming trillion-dollar infrastructure bill, $3.5 trillion reconciliation bill, and $6 trillion annual budget will only make matters worse.

The Fed can help by raising interest rates, which it has indicated it might do early next year. Although politically independent, the Fed will likely face political pressure to keep rates low. Low rates can have a temporary, short-term stimulus effect, though at the price of a bust later. And there are the mid-term elections next year, likely before the bill would come due. Higher rates also make the government’s debt payments more expensive, making the big spending bills more difficult to pass.

If Washington wants to get inflation back to target levels, it needs to spend less while removing obstacles to wealth creation. In addition to fiscal restraint and respecting the Fed’s independence, that means easing back on permits, licenses, trade barriers, and financial regulations that are burdening supply chains and making it difficult for businesses to hire workers and create more goods and services.

Latest Producer Price Index Indicates Inflation Too High

This press release was originally posted on cei.org.

The government’s latest numbers on average changes in prices, as measured by the Producer Price Index (PPI), are up at an annualized rate of 8.3 percent – higher than the Consumer Price Index’s latest reading of 5.4 percent.

CEI Senior Fellow Ryan Young says the discouraging numbers indicate Congress should change course.

“The PPI is often seen as a leading indicator of what is to come, and today’s high reading indicates inflation is much higher than the Fed’s longtime target inflation rate of about 2 percent. High inflation is bad news for the near future. While a return to 1970s-era stagflation remains unlikely because the only damper on an otherwise-sound economy is the pandemic, today’s inflation is still cause for concern because policymakers may not learn the right lessons.

“The main causes of today’s inflation are heavy deficit spending and a loose Federal Reserve policy. The Federal Reserve indicated it will dial things back a bit on its end starting next year, but since there is a midterm election coming up, it will likely face political pressure to keep interests low. On spending, both parties are proving hopeless.

“Today’s inflation is preventable. People are opening up to the extent they feel safe doing so. Congress’ ongoing spending binge will have little or no effect on people’s safety decisions. Policymakers should instead encourage prudence in dealing with COVID risks without risking backlash by being too heavy-handed about it. The most useful actions policymakers could take would be passing non-spending stimulus measures such as loosening regulations on occupational licensing, trade restrictions, and excessive permit and paperwork burdens.”

Jobless Claims Are Down, but Tensions Remain in COVID Recovery

Jobless claims are at their lowest levels since the start of the pandemic; 310,000 people filed first-time claims last week, down roughly 95 percent from a peak of 6.1 million when the COVID shutdowns were at their worst.

The economic recovery is caught in a tug-of-war. On one side, COVID’s delta variant is slowing the recovery, as is the transformation of vaccines and masks into culture war issues. On the other side, economic fundamentals are in mostly good shape, aside from inflation. People are able to find work when they feel it is safe to, as shown in the all-time record 10.9 million job openings available right now. This back-and-forth tension will likely continue for as long as the delta variant or similarly harmful future COVID variants are widespread.

This week’s jobless claims were a swing to the good. The new school year has begun, and in most places, schools are back to in-person classes. This is freeing up a lot of parents who wanted to work, and felt safe doing so, but needed to stay home during last school year’s experiment in remote schooling.

Over the next several weeks, jobless claims may also decline as unemployment benefit extensions expire, prompting more people to reenter the workforce. Economists disagree over how large this effect will be, but no one seriously argues that unemployment benefit extensions have zero effect on people’s incentives to work or not. Whether this incentive effect will be strong enough to overcome delta variant fears remains to be seen.

As Congress follows up its trillion-dollar infrastructure plan with a $3.5 reconciliation bill and then a roughly $6 trillion budget, growth and employment could slow in the medium to long term as more resources get diverted to politicized spending projects, regulatory compliance, and paying off record levels of government debt.

Jobless Claims Drop to Pre-Pandemic Level but Congress Spending Binge Threatens Recovery

This news release was originally posted at cei.org.

The federal government today reported a drop in seasonally adjusted initial unemployment claims to the lowest level for this average since March 2020. CEI Senior Fellow Ryan Young expressed confidence that two pandemic recovery milestones will bring greater gains but also pointed to a big problem on the horizon: a spending binge by Congress.

Statement by Ryan Young, CEI Senior Fellow:

“Jobs are continuing to come back, and the near future also looks good, thanks to two milestones. One, the number of vaccinated Americans crossed 200 million, bringing the country closer to herd immunity. Two, the new school year is beginning, which will allow more parents to resume working if they choose; there are still plenty of openings. COVID’s delta variant clouds matters, but the more people who get booster shots, the less harm it should cause to people’s health and pocketbooks.

“The continued strength of the recovery continues to show how unnecessary Congress’ planned spending binge is. If Congress presses forward on the infrastructure bill and its other trillion-dollar plans, it will be less about doing good, and more about handing out political favors and not wanting to admit that their pet economic theories about stimulus are wrong.”