Bidenomics, gets credit for cooling inflation (WP)

The United States has had a run of good economic numbers lately, showing cooling inflation and ultralow unemployment. Some forecasters have ratcheted down their recession odds.

Many on the left want credit for these conditions. Curiously, though, they seem to ascribe such cheerful results mostly to things the government didn’t do while ignoring the things it did.

That is, if indeed the U.S. economy ultimately achieves a coveted “soft landing,” it won’t be because we did a bunch of kooky, experimental, heterodox things that progressive populists agitated for (and generally failed to get). It will be because
of boring, standard economic textbook fixes for inflation: i.e., supply shocks subsiding, fiscal support fading and, most controversially, interest rates rising.

The Federal Reserve’s 10 rate hikes since March 2022 seem to have dampened consumer demand and brought it more in line with constrained supply — just as traditional economic theory would predict. So far, largely because of immigrants and working
women, the economy has resiliently absorbed those hikes.

So what do Democrats say is moderating price growth instead, if not this pretty conventional explanation?

The White House credits “Bidenomics.” What that means is unclear; administration officials tout vague platitudes about “building the economy from the middle out and bottom up,” as well as big, recently passed industrial policies that (mostly)
haven’t worked their way through the economy yet.

But if you instead define Bidenomics as “respecting Federal Reserve independence and not interfering with Fed decisions even when they’re unpopular,” then sure: Great job, Bidenomics!

Or at least: Great job, Biden.

The president has been terrific at staying out of the Fed’s way, something presidents don’t always do. When the central bank raised rates last time around, then-President Donald Trump went berserk. He declared the Fed chair that he himself had
appointed, Jerome Powell, an “enemy.” Trump also repeatedly threatened to fire Powell, a legally dubious action that would have roiled markets.

It also would have compromised the Fed’s long-term ability to fight inflation. That’s because a central bank’s independence, both real and perceived, is critical to the institution’s ability to achieve price stability. The public must believe the
Fed is willing to “take away the punch bowl” - that is, raise interest rates when the economy overheats — to get inflation under control. That way expectations of further high price growth don’t take root and become self-fulfilling.

Indeed, the Fed’s most effective, least-costly inflation-fighting tool is arguably not rate hikes per se. It’s the Fed’s hard-won credibility that it is willing to raise rates if necessary — even if that’s politically unpopular, and even if
politicians start an anti-Fed vilification campaign.

And boy, have they. Not only Republicans during the Trump era, but some Democrats in the past year, too.

As the Fed has raised rates this time around, progressive lawmakers and pundits have railed against central bank officials, sometimes in ad-hominem terms. They have accused Powell, for instance, of deliberately aiming to get vulnerable workers fired,
start a “class war” and provoke a painful recession.

To be clear, it’s not totally preposterous to worry that aggressive interest-rate increases could cause a recession. They still might! In fact, most previous efforts to kill inflation through rate hikes have overshot the mark and triggered downturns.

But the main progressive critique is not that rate hikes might be slightly miscalibrated; rather, it’s that rate hikes — that standard inflation-fighting tool — can only do harm, and therefore should be avoided pretty much altogether.

Why? Rate increases are designed to cool demand. And many leading progressives deny that ultrahot demand has anything to do with the root causes of inflation today. (After all, acknowledging that consumer demand has been supercharged might implicate some
of the fiscal policies that Democrats have embraced, such as near-universal stimulus checks.)

Instead, progressives argue that inflation was initially due to supply-chain disruptions but now, primarily, to “corporate greed.” This diagnosis leads to a very different set of prescriptions than the ones recommended by economic textbooks. Instead,
many progressives advocate for price controls, such as Masschusetts Democratic Sen. Elizabeth Warren’s proposed ban on consumer price increases that are “unconscionably excessive.”

Democrats have also pushed other punitive measures, such as “windfall profits taxes” or revocation of drilling permits.

Advocates often portray such policies as innovative measures that defy obsolete economic orthodoxies. The reality is they’ve been tried before, across different countries, including our own. They’ve generally backfired, widening the gap between
strong demand and constrained supply.

Fortunately, despite plenty of jawboning about profiteering (including from Biden), recently proposed anti-greed measures have not come to pass. Democrats couldn’t produce the votes.

Nonetheless, the advocates of these heterodox policies are now, puzzlingly, trying to take a victory lap. More appropriate might be a willingness to give credit where credit is (boringly) due.
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