Democrats’ dangerous inflation assumption | The week

At a CNN town hall on Tuesday, President Joe Biden rejected progressive Democratic plans to write off $ 50,000 in student debt – at a cost of around $ 1,000 billion – although he indicated his support to $ 10,000 loan forgiveness. Biden said he would rather spend some of the difference on early childhood education than forgive “the debt, billions of dollars in debt, for the people who went to Harvard, Yale and Penn.”

A lot left are unhappy with Biden’s decision. “Nowhere does it say that we need to trade early childhood education for student loan cancellation,” said Representative Alexandria Ocasio-Cortez (DN.Y.). “We can have both.” AOC’s response reflects a new consensus among many Democratic politicians and pundits – not to mention the leftist Twitter econ – that Washington doesn’t really have to worry about the cost of things. With interest rates and low inflation, Washington has plenty of room to spend, spend, spend. Indeed, Biden also makes this point when he talks about his $ 1.9 trillion COVID-19 relief plan. “Now is the time we should be spending,” he also told City Hall. “Now is the time to go further. ”

Again, the “moment” Biden speaks of does not just refer to the current economic need for increased government assistance (which, as I have written, not worth nearly $ 2,000 billion). It also almost certainly means that low interest rates and low inflation have created such a favorable fiscal position that America almost really can’t afford not to spend a lot, whether it’s on household checks, l aid to cities and states or to investments in infrastructure. This, of course, despite budget deficits and a record national debt.

But what if this benign fiscal situation turns hostile? What if today’s placid macroeconomic reality becomes much more volatile and unpredictable? It is not a crazy idea. Policymakers shouldn’t assume that the good times will never end when making tax and spending decisions. They should avoid huge budget bets as the future will be much the same as the recent past.

A plausible scenario of a big change in the US economic climate – as well as other wealthy economies – is presented in the 2020 delivered The Great Demographic Shift: Aging Societies, Decreasing Inequalities and Resumption of Inflation. Economists Charles Goodhart and Manoj Pradhan argue that the current macroeconomic situation characterized by consistently low interest rates and low inflation was created by a particular set of historical economic circumstances. Demography and globalization are essential here. The end of the 20th century saw an influx of workers into labor markets around the world thanks to the baby boomers, as well as the arrival of workers from China and Eastern Europe after the dissolution of the ‘Soviet Union. This shock to the labor supply, according to Goodhart and Pradhan, has tended to lower inflation – especially as seen in wage growth – and interest rates. And thus create a world where it was easy for government and business to borrow.

But now these demographic and globalization shocks are being reversed. Populations of working age are peaking or even declining globally. And the increase in workers’ wages in China means that sending jobs is no longer the business of Western companies. As a result, Goodhart and Pradhan conclude, the bargaining power will revert to domestic workers and move away from employers, which will increase wage inflation. And at the same time, the number of older people, who consume rather than produce, will continue to increase. This means more demand for goods and services – and, again, more inflation. “The great demographic shift and the retreat from globalization will bring back stronger inflationary pressures – this is our strongest point of view,” Goodhart and Pradhan wrote in a 2020 article. trial.

Thus, a world of higher inflation, higher interest rates, and greater fiscal challenges for Washington – a world few policymakers seem to envision or even imagine as possible. Still, the pandemic and the tsunami of money spent to combat it should make Washington think more about such a possibility.