How Democrats Blew It on Inflation

In avoiding the missteps that followed the 2008-09 financial crisis, officials made new mistakes that led to political defeat

By Nick Timiraos of The WSJ. Excerpts:

"President Biden hadn’t even been inaugurated when he and his senior advisers made a monumental gamble in January 2021 that would reverberate through his presidency."

"The result was the American Rescue Plan, a package that boosted a child tax credit, sent $1,400-per-person direct payments to households, and directed $350 billion to state and local governments.

Politically, those choices backfired. Billions of dollars in Covid-19 aid were already coursing through the economy, the aftereffect of bipartisan spending measures under Donald Trump. Strong demand from Biden’s additional fiscal stimulus, ultralow interest rates and a successful vaccine rollout ran headlong into crippled supply chains and discombobulated labor markets."

Bad luck piled on. New Covid variants, Russia’s invasion of Ukraine and China’s Covid-related lockdowns continued to upend global supply chains and commodity markets. Inflation soared in most of the world’s richest economies—across Europe, Canada, and Australia.

Democrats had bet voters would reward them for a strong labor market recovery with tangible gains for workers. Instead, those voters recoiled at the sudden cost-of-living increases. Consumer prices during Biden’s term have risen 20%, compared with 8% in Trump’s term."

"On Election Day, roughly 40% of voters said the economy was their top issue, far outstripping any other. Those voters backed Trump by a 22-percentage-point margin. Inflation has declined without a recession, but many were thinking instead about how prices are still high."

"Republicans were opposed to another stimulus package in early 2021. So Democrats had to maneuver with a razor-thin one-vote majority in the Senate, with Vice President Kamala Harris able to break a 50-50 tie.

Sen. Joe Manchin, the most conservative Democrat in the chamber, was stunned when colleagues told him the $1.9 trillion price tag and warned them it was a massive overreach, he said in a recent interview."

"Within hours of speaking up, he found himself face-to-face in the Oval Office with Biden. Manchin begged the president to pump the brakes. The country hadn’t even digested the stimulus approved weeks earlier. It didn’t make sense to throw another $2 trillion on top. 

Biden was unmoved."

"The loudest criticism came from Larry Summers, who had been a top Obama adviser but wasn’t part of Biden’s team."

"He pointed to how Democrats had lost badly at the ballot box during other bouts of inflation in 1968 and 1980. “The sense of serenity and complacency being projected by the economic policymakers, that this is all something that can easily be managed, is misplaced,” he said that spring."

"White House advisers kept telling Manchin not to worry. One pointed to how 17 Nobel laureates said inflation would be transitory. Manchin shot back: “You’ve got 17 educated idiots telling you what you want to hear.”"

"Focus shifted to passing Build Back Better, a separate $3.5 trillion spending bill that Democrats envisioned as Biden’s signature economic initiative. A meaningful acknowledgment that inflation was a problem would raise alarm bells over further spending. That, in turn, could kill the sprawling healthcare, education and climate package.

"Many economists, inside and outside the White House, genuinely believed inflation would be transitory. Still, Democratic-affiliated analysts and economists outside the administration faced pressure to play down inflation risks to avoid imperiling the administration’s broader agenda, said Strain, the economist at the American Enterprise Institute.

“They kept insisting it was transitory because they were trying to shove BBB down my throat,” said Manchin, who ended negotiations over the package at the end of 2021."

"officials treated inflation as a communications problem that could be improved with better messaging."

"economic advisers were overruled at times when it came to proposing measures that might have lowered consumer prices."

"In April 2022, for example, some of the president’s economic team pushed for rolling back tariffs on certain Chinese imports that had been imposed by the Trump administration. Even if it might not make a noticeable dent in consumer price gauges, they argued it was better for the White House to be viewed as throwing its back into bringing down prices."

"Political advisers sympathetic to concerns from labor groups and foreign-policy advisers who wanted to maintain leverage against Beijing argued against the move. Biden sided with them when his economic advisers said removing tariffs wouldn’t move the needle on inflation.

"“President Biden said inflation was his No. 1 priority, and I don’t think he acted like it was his No. 1 priority,” said Strain." [Michael Strain, head of economic-policy studies at the right-leaning American Enterprise Institute.]

"Critics say the White House could have done more to cut deficits that were unprecedented for a peacetime economy with low unemployment. Instead, the administration passed several pieces of legislation that boosted spending on infrastructure and clean-energy investments, including the Inflation Reduction Act in 2022."

"The spending blitz of 2020-21 revealed that “these things have a momentum of their own,” said Raghuram Rajan, a former governor of India’s central bank. “It is hard to reverse on a dime, and then it goes further than you want.”"