While I believe the Fed has the resolve and know how to tame inflation, that indeed does remain to be seen. However, that isn't the point of this post.
What is on my mind is a mistake I hear being made often as an apology/excuse for Biden. Since Biden is currently the President, it is the left who is offering this excuse. Had Trump won, I would fully expect the right to be making the same mistake.
The mistake is thinking Biden (like Trump before him only more so with Biden) does not bear some blame for the inflation numbers we see. The short version is: "It's not Biden's fault; it's the pandemic's."
Had the apologist said instead, "It's not Biden's fault; it's the Fed's," I would have cut them some more slack. The Fed is ultimately the reason we do or do not have true inflation (a sustained increase in the overall price level relative to the medium of account, USD).
The pandemic and the policy responses to it have generated enormous supply and demand disruptions. The magnitudes here quite certainly matter. But the price affect from all of that is not inflation. It is a change in relative prices--dramatic as they are, they cannot result in an inflationary outcome without the Fed as an accomplice. Relative prices are the market adjusting to reality finding new price and quantity equilibria. This very necessary process is why price controls don't work causing painful problems themselves.
Here is the thinking that leads the apologist astray:
- The pandemic messed everything up where we couldn't work as much, killing production, etc. (negative supply shock).
- It is no surprise the shelves are bear. (scarcity at current price levels)
- With fewer things to buy and all the money still out there including all the government support, prices had to go up--same/more dollars chasing fewer goods and services . . . I thought you understood economics, Winkler?
One problem with that story is that it neglects half of the equation--income. When we produce less, we have less income. We are poorer than before (the economy's output and perhaps its potential output is now materially lower). Understanding that is a glimpse into how a bad event like a pandemic cannot by itself cause inflation--another problem with that story. Inflation comes if the monetary authority, the Fed in our case, fails to properly adjust monetary policy adjusting it downward.
Negative supply shocks like pandemics increase poverty--or reduce wealth depending on your framing. They make us poorer. Poorer might look like inflation, but it isn't. Consider this:
In this chart the farther to the right and/or the lower on the chart a country is, the wealthier it is in terms of how much it works (average annual working hours on the y-axis) for the income it generates (GDP per person on the x-axis log scale). Notice this data is for 2017. For example, Brazil has a per capita GDP of about $14,500 with the average worker working about 1,710 hours per year. The United States enjoys a per capita GDP of about $60,100 with very similar average worker hours, about 1,760. People in America are a lot more productive than people in Brazil.*
Along the vertical we can make another comparison between Hong Kong (GDP = $59,800 & Hours = 2,190) and the U.S. (GDP = $60,100 & Hours = 1,760). Again the U.S. has higher productivity generating about the same income as HK for considerably fewer hours worked.
Ultimately time is the common currency all humans deal in as it is the one truly binding constraint. Looked at this way we can consider what a really bad supply shock might look like for the U.S. Imagine our total production went from $60,100 all the way down to Brazil's level but hours worked stayed the same. Suddenly the cost of our income (cost being hours worked) is much, much higher. Alternatively, if we now had to work as much as Hong Kongers do for the same income, the cost of our income is again much higher. We are working the same for less income in the first case and working a lot more for the same income in the second. In terms of hours worked is this inflation? No, it is an increase in poverty/massive reduction in wealth.
Think about it this way: If you suddenly were relocated from the U.S. to Brazil doing the same job, you'd immediately notice that your pay was lower. If you were purely on the average, you'd notice that working your regular 1,700 hours per year only allowed you to buy about a quarter of the goods and services you enjoyed in the U.S. ($14,500/$60,100). You might say, "Wow! Things sure are expensive in Brazil." And you'd be right. But if you then concluded, "They must have had a crazy amount of inflation," you'd be quite wrong obviously. You personally experienced what looks like inflation to you but is really just a negative wealth effect due to the relocation.
People instinctively but mistakenly think bad events will cause inflation by assuming their incomes will remain the same while there will be fewer goods available. But for the entire economy incomes must go down if production goes down since they are the same number.
So what did Biden (and Trump and Congress) do? Biden trumped Trump by helping Congress to spend a LOT OF MONEY.
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The reason spending during Biden's term has been so problematic is that we were largely exiting the pandemic at that time. You don't have to become an adherent to or expert on the fiscal theory of the price level to understand the issue. These greater and greater levels of government spending put more and more pressure on the Fed to constrain monetary policy so that the excess spending did not induce inflationary effects. So far the Fed has not been able to fully offset that spending.
Is the Fed to blame? Yes. Was its job made much harder by what the fiscal authorities (Congress and the President) did? Also, yes. Are there other knock-on effects from the spending and associated government programs the pandemic gave cover to? You bet, and they are likely worse than inflation [please, God, don't let the Fed now say "hold my beer".]
*There is a subtle pro immigration word choice I made here. Notice I didn't say "Americans" or "Brazilians". It is not the people so much as it is the economy they are working in. Relocate those same Brazilians to the United States, and their productivity would magnificently rise as if by magic even though it would for a time still be below current American rates.
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