by Rep. Warren Davidson
It doesn’t take an economist to figure out that historically low interest rates, two rounds of stimulus payments, extended unemployment insurance, and unrestrained government spending will result in higher consumer demand, outstripping the supply of goods, especially since employment levels—and productivity—have not yet returned to pre-pandemic levels.
And yet, it has taken several months for the Federal Reserve and the Biden Administration to even admit what Americans have known for months: Inflation is real and far from transitory. Democrats started by gaslighting Americans, claiming that inflation is a “high class problem.” Then they tried to attribute the inflation to supply chain bottlenecks—never mind that Administration policy has contributed to those very same shocks. Now that the administration admits the obvious, though it’s kicked the political football back to the Federal Reserve. Meanwhile, Joe Biden falsely claims Build Back Better is positioned as the solution to inflation. In reality, pouring more money into this economy right now is the equivalent of pouring gasoline on the fire.
Just in case President Biden doesn’t have a “secret plan to fight inflation,” he can borrow mine:
First, the Federal Reserve must gradually stop distorting the economy. Right now, every month, the Federal Reserve buys $80 billion of U.S. Treasuries and $40 billion of mortgage-backed securities (MBS). Does the real estate market really need higher prices courtesy of the Fed? The Federal Reserve’s announcement that they would accelerate their tapering of these purchases is a step in the right direction. They need to remain committed until they incrementally return to the proper level of Fed intervention: $0.00.
Likewise, Congress should stop spending money it does not have. Like the Fed, Congress cannot go cold turkey without causing real harm. President Trump presented a budget that balanced in 15 years. Congress ignored it. Unfortunately, President Trump signed the bills that Congress passed rather than insist on a path to balance the budget. Fifteen years was hardly aggressive.
Right now, workforce participation for 18-65 year-olds is around 62%. At the time of the 2008 financial crisis, it was closer to 67%. Unfortunately, participation never recovered. In fact, it kept trending down during the Obama administration. Under the Trump administration it improved, but only to 63.5%. Based on that gap in participation, prior to COVID, there was still a large upside potential for economic growth.
To deal with inflation, nothing should discourage investment in America or participation in our workforce. Too many of Biden’s Build Back Better initiatives harm productivity or discourage workforce participation. One proposal I find interesting – childcare – doesn’t even come with an expectation that you work, go to school, or even volunteer to help your community. Thankfully, Senator Joe Manchin (D-WV) has taken a firm stand against such reckless spending. Let’s hope he holds strong as Leader Schumer threatens to proceed with a vote early next year.
Getting people back to work would help to ease the strain that surplus demand is placing on retailers and manufacturers. This requires not only limiting the government interventions mentioned above, but also doing away with measures (like COVID19 mandates) artificially keeping people out of the workplace.
Late last week, the Bank of England surprised the world by announcing an interest rate hike in response to inflation levels. Historically, negative surprises can shock markets and are best avoided, but the instinct to get inflation under control is correct. The Federal Reserve has been abundantly cautious about shocks to the market. It’s time for them to discount politics and focus on their core mission: stable prices and full employment.
In a crisis, Democrats have only one solution: more government. Right now, America risks a fatal overdose of government. The solution is simple: more freedom, less government, and sound money. Unfortunately, if Congress and the White House conspire to dump more government fuel on the already roaring fire, the Federal Reserve may be forced to cover by continuing to grow its already bloated balance sheet. This would be a setback for efforts to fight inflation. Senator Manchin is already leaning in on this plan, now the other members of Congress should do the same.
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Rep. Warren Davidson is a Republican who represents Ohio’s 8th Congressional District. He is a contributor to RealClearMarkets.
