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Inflation Nation and Our Political Realignment

Both parties have come to assume that federal debt doesn't matter. What happens if the free ride ends?
Money out the window deficits debt

Inflation is back, baby, even if that statement is slightly misleading. In a sense, inflation never really went away—college tuition prices have been massively inflating for years, though we tend not to think about them in those terms. And some of the current inflation is expected to cool soon. The recent spike in gas prices, for example, was primarily caused by panic-buying following a hack at a major pipeline that’s since back up and running. Memorial Day travel might still be pricey, but a 1970s-esque OPEC crisis this is not.

Still, we gauge inflation primarily by the Consumer Price Index, and based on that, the news is not good. The New York Times reports:

Consumer prices jumped at the fastest pace in more than a decade in April, surprising economists and intensifying a debate on Wall Street and in Washington over whether inflation might reach levels that would squeeze households and ultimately undermine the recovery. …

On Wednesday, stocks slumped more than 2 percent, their biggest decline since late February, after the government reported in the morning that the closely monitored Consumer Price Index climbed 4.2 percent in April from a year earlier, its fastest pace since 2008.

There are neurotics living in haunted houses who are “surprised” less often than economists. Naturally most of our tenured gurus failed to predict this inflationary episode, just as they’ve failed to predict just about everything else that’s ever happened to the economy. Yet now that inflation is here, they’re counseling caution. Some of this, they point out, is due to temporary supply shortages of goods like lumber and microchips. Much more of it is due to the weird yet encouraging post-pandemic economic recovery, as lockdown restrictions ease and pent-up dollars go flying into the summer haze.

Yet it’s also hard not to see the omens here. We’re barely at the start of that recovery, yet inflation is already taking off? We’ve only just begun to dole out President Biden’s massive stimulus package and the economy is already overheating? As Noah Smith at Bloomberg reminds us, inflation is psychological and often takes its cues from the behavior of others:

The scary scenario here is that businesses see cost-push inflation, they see President Joe Biden and Congress borrowing a ton of money, and they see the Fed keeping interest rates low, so they decide that prices are going to have to go up, and they start raising their own prices immediately to beat the rush. Of course, when everyone tries to beat the rush, that becomes the rush.

Beyond higher prices for Chevys and canned soup, there’s also a danger in our policy response to inflation. In the early 1980s, Federal Reserve chairman Paul Volcker finally put an end to the inflation that had plagued the United States for more than a decade by hiking interest rates. This caused a short-term recession but it ultimately stabilized the economy and helped fuel the Reagan/Clinton boom. The Fed could do the same thing today—except we have a staggeringly massive national debt whose interest payments are already gunking up the budget. Hike interest rates and you end up with even more interest payments. This could force lacerating cuts to the federal government and potentially even worse consequences.

So just how doomed are we? Right now, we simply don’t know. But in the meantime, there’s a political angle to consider. Back in 2010, many conservatives warned that serious inflation was just around the corner, a consequence of President Obama’s stimulus package and the coming economic recovery. It didn’t happen. Interest rates stayed low, money stayed loose, and Congress went on a spending binge.

All of this served to effectively obsolesce the fiscally conservative critique. Why keep budgets balanced and government small if there were no consequences to big spending? The Tea Party fizzled; their wonk-in-chief Paul Ryan was defenestrated; Donald Trump barely even pretended to be a budget hawk. A new generation of conservatives arose who were less concerned with shrinking the administrative state than fighting big tech and the woke agenda. Both political parties became as comfortable with red ink as they’ve perhaps ever been.

Now the free ride could be about to end. Our politics never remains fixed for long, and the reimposition of serious spending limits is one trend to watch.

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