The White House eventually admits it made a policy mistake in underestimating inflation, with some officials even offering a modified, limited mea culpa. We assume this is progress, but the return of rising prices after a 40-year hiatus is also a historic policy failure worth noting. It represents a failure of advanced expertise that is a lesson for the future.
“I think I was wrong at the time about the path that inflation was going to take,” Treasury Secretary Janet Yellen told CNN on Tuesday, referring to a 2021 comment that there was “a small risk of inflation.” “There have been unforeseen and large shocks to the economy that have pushed up energy and food prices, and supply shortages that have hit our economy hard, which I didn’t fully understand at the time, but we recognize it now.”
Note the default setting for “big shocks” that were “unexpected”. This is a way of blaming Ukraine’s inflation and pandemic supply chain issues that deny the role of Biden administration politics. The implication is that no one anticipated these problems or the inflation they could cause.
The truth is they were expected and many people have warned about inflation. Some of these warnings appeared on these pages from conservative economists. Prominent Democratic economist Larry Summers also warned in March 2021 that overspending and loose monetary policy could lead to an excess of economic demand over supply.
Why were these warnings ignored? The answer is a combination of politics and flawed economic models. Democrats ruled all of Washington and wanted to justify a massive expansion of the welfare state. Your economic household means are more and more government spending and loose monetary policy. Most of the press endorsed the need for Democrats’ $1.9 trillion spending explosion in March 2021, even though the economy was growing rapidly at the time.
While the Federal Reserve made its monetary mistakes, the progressives had no objections. They embraced the modern monetary theory fad that low interest rates could fund any amount of government spending more or less forever.
All of this was another failure of advanced economics. By focusing solely on macroeconomic demand and ignoring supply and regulatory constraints, their policies fueled the inflation we have today. They also ignored the role of excess money and forgot economist Milton Friedman’s famous lesson. As President Biden explained in an April 2020 interview, “Milton Friedman is no longer running the show.” That’s a campaign promise he kept.
Progressives pushed for the same agenda for months, even as the evidence of inflation became too obvious to ignore. The inflation was reportedly “temporary”. The White House continued to push its Build Back Better (BBB) plan for nearly $5 trillion in new spending – even claiming it would cure inflation.
No fewer than 17 Nobel laureates in economics confirmed all of this in a remarkable “open letter” last September. The White House circulated the letter far and wide, and Mr. Biden often described it as an appeal to authority. “As this agenda will invest in long-term economic capacity and improve the ability of more Americans to participate productively in the economy, it will ease longer-term inflationary pressures,” the letter said.
We list the names of the signers of the letter nearby. They are all notable economists and some have written for these sites. Since BBB didn’t pass, they can say that the predictions in their letter were never tested. But their inability to see in September that inflation was already rising rapidly makes their claims as a failure of expertise almost worse. Annual inflation hit 6.2% in October last year and is now over 8%.
A hallmark of our era is the collapse of public trust in governments and experts of all kinds. But it’s hard to blame the public when so many experts and their policies have failed so spectacularly. The inflation that progressives helped create, didn’t anticipate, and then ignored is another example of deserved public distrust.
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Appeared in the print edition on June 2, 2022.
https://www.wsj.com/articles/when-progressives-fail-inflation-edition-janet-yellen-economics-white-house-biden-rising-prices-11654121580 When Progressives Fail, Inflation Edition