Biden Starts to Feel the Heat Over Inflation | Opinion

Last week we got some insight into just how frustrated the White House is about rising inflation. In response to a question from a reporter about rising prices, Biden retreated into sarcasm and vulgar name calling. The takeaway should be clear: the White House is extremely concerned about inflation but does not know what to do about it.

The Biden administration's concern is likely a response to public opinion. Recent polls show that voters are growing more concerned about inflation and less concerned about the pandemic. They also show that voters expect prices to keep rising and, most importantly for the White House, they blame these rising prices on the president.

We can only guess what advice Biden is receiving behind closed doors. But it is likely that he is being told two stories, one by his Treasury Department and the other by the Federal Reserve. The Treasury has retreated into outright fantasy, blaming inflation on a sudden rise in monopoly power and price-gouging. This is the sort of rhetoric that usually emerges from failed socialist states in Latin America as their economies collapse—and it usually precedes cartoonish attempts at solutions, such as when Venezuelan president Nicolas Maduro had the army seize a toilet paper factory in 2013.

Fed chairman Jerome Powell is probably telling Biden something more reasonable, albeit not enormously encouraging. Powell knows inflation is a problem. But he also knows that if he raises interest rates too fast to try to fight it, the stock market might collapse. The jitters that we have seen in the past few weeks are related to this dilemma. In October, the markets were expecting a single rate hike in 2022; by mid-January they were expecting four. Meanwhile, the S&P 500 is lower than it was six months ago.

A stock market collapse would have knock-on effects on other financial markets. Financing for low-grade corporate bonds would dry up, for example. This would lead to a wave of defaults—especially in sectors that were forced to close during the lockdowns and that tapped borrowing markets to keep the lights on. In short, raising interest rates too far too fast risks a financial crisis and a recession.

There are also murmurs that the inflation might be caused by supply chain disruptions. It is becoming increasingly obvious that those disruptions are the result of lockdowns and vaccine mandates. In Canada, Prime Minister Justin Trudeau effectively went into hiding as thousands of truckers marched on Ottawa. Trudeau, who is fully vaccinated, is saying that he is isolating because he was exposed to COVID-19. Since the truckers are marching against vaccine mandates, the messaging coming from Trudeau's office is confusing at best.

If these are the true roots of the present inflation, it is not clear that Fed rate rises will stamp it out. They could just cause an inflationary recession and the economy could slip into stagnation, as it did in the 1970s.

Joe Biden
US President Joe Biden speaks to the press as he arrives at Allegheny County Airport in West Mifflin, Pennsylvania, January 28, 2022, as he travels to Pittsburgh to speak on the economy. SAUL LOEB / AFP/Getty Images

Wages have started taking a hit too. In 2021, inflation meant that on average workers took a 2 percent pay cut as rising prices outstripped rising wages. But as bad as it is for workers, inflation is even worse for those living on fixed incomes, such as pensioners. Workers can approach the boss and ask him to pass on some of the revenue from the increased prices. But pensioners and others living off accumulated wealth must rely on financial market gains outstripping inflation. As we have already discussed, the Fed is constrained on one side by inflation and on the other by the risk of asset markets collapsing—either of which would be extremely painful for retirees.

It hardly needs to be said, but alienating pensioners is bad politics. In 2020, voters aged 65-74 had a 76 percent turnout rate. By contrast, the 18-29 years olds that the Democrats target so aggressively only had around a 50 percent turnout.

So, what happens now? Inflation is clearly on the Biden administration's radar. It seems like a problem that is unlikely to go away. The savvy political strategy would be to look for a distraction. Perhaps that is, in part at least, why there has been so much focus on geopolitical tensions in Eastern Europe. But conflict in the region would only lead to further increases in energy prices—potentially dramatic ones—and these would soon be felt by Americans.

Any attempt to increase attention on the pandemic will only lead to more pressure on prices too. After all, much of the inflation is due to the supply chain crisis driven by lockdowns and vaccine mandates. Yes, all roads lead back to inflation—even those that might otherwise distract from inflation.

Unless something changes, inflation is set to be the central theme of the Biden presidency. It is a not a desirable theme for a sitting president. Inflation leads to beleaguerment and confusion. After years of inflation and shortages in the 1970s, President Jimmy Carter gave an address in 1979 now known as the "malaise speech." In it, he tried to level with the American people by being realistic about the problems that the country faced and the capacity it had—or rather, did not have—to confront them.

President Carter appealed to the American people for unity and for a moral renewal at home. He said that the country's problems were "much deeper than gasoline lines or energy shortages; deeper even than inflation or recession." He then asked for people to commit "together to a rebirth of the American spirit." The speech bombed and Carter was trounced by Ronald Reagan in the 1980 election.

Today, given the much deeper partisan divide in American politics, Carter's speech does not seem like it would be possible. It is worth thinking about what such an appeal would look like today if Biden had to give a similar speech. What would he say? Would it be possible to appeal for unity and resilience in the face of an insurmountable crisis?

Philip Pilkington is a macroeconomist with nearly a decade of experience working in investment markets, he is the author of the book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory.

The views expressed in this article are the writer's own.