Tuesday, October 12, 2021


Chairman Powell and President Biden are rolling the dice on runaway inflation and slow growth.  

The delta variant is disrupting though not derailing the recovery, but the Evergrande meltdown in China and global supply chain disruptions could make matters much worse.

By postponing the phasedown in monthly purchases of Treasury and mortgage-back securities, the Fed doesn’t create new chipmaking capacity, but cheap credit helps push up home prices 20 percent a year.

This creates a dangerous asset bubble and torpedoes affordability for younger folks. Around faster-growing cities, that imposes higher wage demands on growing businesses trying to recruit talent.

Many business leaders sense surging labor and material cost pressures are becoming structural —not transitory. Building those expectations into annual business plans would create self-sustaining wage-price spirals.

Future GDP growth and inflation significantly depend on labor force and productivity growth. During the 2010s, those grew 0.6 and 1.9 percent annually, and before the pandemic, GDP advanced 2.5 percent annually under President Trump’s program of lower taxes and deregulation.

We can’t do much about the near-term growth of the native-born working-age population, but immigration policy is in shambles. The border is hemorrhaging with low-skilled asylum seekers who will be looking for jobs in industries where opportunities are shrinking. For example, hybrid office-home work arrangements and automation permanently destroy jobs at restaurants and retailers, dry cleaners, and the like. 

Mr. Biden is obtuse about sealing the southern border, ending chain immigration, and increasing emphasis on skilled factory and STEM workers.

Biden’s policies are discouraging labor force participation. The Child Care Tax Credit provides $3600 for children under six and $3000 for those under 18, but declines as family incomes rise. Expectations that the program will be extended by the American Family Plan and supplemented with free pre-K education and two years of free college further enables stay-at-home parents to opt-out of the labor force.
The student loan program is driving up tuition and debt, and about half of new college enrollees earn a negative return on their investment. They would be better off enrolling in an apprenticeship program, but Mr. Biden wants to make the first two years of college free.

Wasting capital seems to be a preoccupation of the Powell-Biden alliance. Keeping short-term rates near zero and the benchmark ten year-Treasury less than 1.5 percent for longer than is necessary boosts record junk bonds sales and multiplies the number of zombie companies—businesses whose revenues don’t cover labor and material costs plus interest payments.

As the Fed normalizes interest rates, many more companies will be unable to roll over debt and file for bankruptcy, and a 2 percent jump in mortgage interest rates could easily pierce the housing bubble. The combination could hold the Fed hostage to restart massive Treasury and mortgage securities purchases.

Curtailing domestic petroleum production won’t enable ordinary households to buy electric cars at a faster clip. The buildout of EVs can only happen at the pace that science brings down the cost of batteries and reduces charging time. Beyond adequately funding research, extra federal money won’t yield much and would be spent better elsewhere.

Limits on big oil firms like Exxon and Chevron only encourage less efficient, capital-wasting production by smaller firms and greater dependence on imports from places like Russia.

Mr. Biden wants to bias federal subsidies for EV purchases toward union-made vehicles. Unfortunately, GM’s offerings pose a fire hazard if parked in garages, and Ford’s EVs are less inspiring than Tesla.  Placating the UAW merely threatens public safety and wastes capital by moving resources from more innovative to less competent businesses.

Subsidizing the pace of investment in green technology will drive down wind, solar, and battery costs more quickly. Still, benefits to economy-wide productivity and growth would be greater if markets were left to allocate capital to its optimal allocation between green industries and other activities.

Once the economy recovers from the pandemic, the Fed and Administration forecast 1.8 percent trend growth. That’s quite a stepdown from the Trump record and an admission that their policies are slashing productivity growth by nearly a third.

With the net cost of the Biden program likely to exceed administration estimates by as much as $2 trillion, the Fed will be under enormous pressure to print more money and let inflation solve the federal government’s debt problems.

Economists that advise President Biden suggest the Fed should set its inflation target significantly greater than 2 percent to better support growth.

The hyperinflation of the 1970s indicates otherwise, but that’s how you put lipstick on a pig.

• Peter Morici is an economist and emeritus business professor at the University of Maryland and a national columnist.

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