EDITOR NOTE: For more than four years, wages rose at a better clip than inflation. That all changed a little over a month after Joe Biden took office. U.S. wage growth and the Consumer Price Index (CPI) flipped, and now wages are struggling to keep up with Biden inflation. What’s the Biden Administration’s answer for this? Spend. The federal government had spent $5.3 trillion since March of 2020 to deal with the pandemic. Now, the Democrat-controlled Congress passed a $1 trillion infrastructure bill, and a $3.5 trillion budget package (which independent experts say will be more like $5 trillion) is on its way. Biden says that all this spending “will reduce inflation, reduce inflation, reduce inflation," but that’s just not how it works. The government spending and their plans to spend more is so out of control right now that even some moderate Dems have “serious concerns about the grave consequences” of this spending spree.
What is all this “Biden inflation tax” talk really about? What is the actual effect of inflation on the lives of real people?
Well, below is a chart that compares yearly wage and inflation rates for each month from 2017 through July of this year using Bureau of Labor Statistics data. Wage rates are in blue and inflation (as measured by the consumer price index) is in red. When blue is on top, as it was during the entire Trump administration, workers’ wages are beating inflation and their standards of living are improving. When red is on top, they’re not.
While President Biden claims that it is “indisputable” that his jobs plan “is working,” this chart unequivocally shows that it is not, at least not for American workers. Rather, inflation is surging, more than wiping out any wage gains those workers might have experienced.
So, why is inflation surging in the Biden era? One factor is an imbalance between supply and demand. Emerging from the pandemic, we are in a period of high demand boosted by unprecedented government largesse. Thanks to that largesse, in June of this year, personal savings were nearly $400 billion higher than in January of 2020. People have money and now they’re spending it.
But the pandemic disrupted production and order flow, hobbling supply chains. Simply, people were unable to work and businesses were unable to anticipate future demand. Bad policies that pay people more not to work than they can make with a job have exacerbated the supply chain disruptions. You can’t produce and deliver goods if you can’t find workers.
Federal Reserve Bank Chairman Jerome Powell calls these supply chain disruptions temporary “bottlenecks” – such as the shortage of computers chip that is limiting automobile production. The White House agrees. But what do they mean by “temporary”? Treasury Secretary Janet Yellin recently stated that we “will have several more months of rapid inflation.” That may technically be temporary, but it’s bad news for American workers.
And there is a longer-lasting problem in addition to bottlenecks. As economist Milton Friedman stated, “Inflation is always and everywhere a monetary phenomenon.” Simply, the more money there is, the less it’s worth and the more it takes to purchase goods. Monetary policy that increases the money supply drives inflation, with long-term consequences. As measured by the Fed, since February of 2020, the money supply has dramatically increased by 32% – nearly a third.
When addressing inflation, it would be a huge mistake to underestimate the impact of the Fed’s monetary accommodation of the Biden administration’s reckless fiscal policy.
Despite the federal government spending a staggering $5.3 trillion since March 2020 and the passage of a $1.1 trillion infrastructure bill, Biden and his fellow Democrats are pushing additional spending as part of a $3.5 trillion budget reconciliation package. An independent analysis by the nonprofit Committee for a Responsible Federal Budget estimates that the real costs of that package are over $5 trillion if scored honestly. Those numbers aren’t just staggering, they are all but unfathomable. But if the Fed is willing to pour massive amounts of dollars into the economy, Democrats are obviously willing – if not anxious – to continue spending it, consequences be damned.
It doesn’t take an economist to see the inflationary impact. Restaurant Business, an industry publication, recently ran an article bluntly titled “Yes, It’s OK to Keep Raising Prices.” That opinion isn’t limited to restaurants. In the Institute for Supply Management’s July report, 66.7% of service businesses said they are raising prices. In the National Federation of Independent Business’ monthly survey for July, 52% of respondents reported raising prices.
In what could be a lifeline for American workers, at least one Democrat seems to get it. Sen. Joe Manchin recently issued a statement expressing his “serious concerns about the grave consequences” if Congress decides to spend “another $3.5 trillion” in an “economy that is on the verge of overheating.” Manchin’s concern is that “rising inflation rates are now an unavoidable tax on the wages and income of every American.” Well, of course they are.
Biden, unfortunately, just doesn’t get it. In a recent CNN interview, he declared that these multitrillion-dollar spending bills “will reduce inflation, reduce inflation, reduce inflation." Just to be clear – they won’t. Seriously, they can’t. There is no rational economic school, anywhere across the political spectrum, that believes higher government spending actually reduces inflation.
Nonetheless, you’ll hear a lot about that in the coming months. The administration will claim spending doesn’t matter because the government can print as much money as it needs – rather than relying on old-fashioned things like taxes to pay the bills. It’s called modern monetary theory and it’s simply a rationalization for limitless deficit spending – all of which is nonsense. Economist John Christensen calls it the “Magic Money Tree.”
In reality, as the Fed and Democrats strive to prove this theory, flooding the economy with dollars and spending, you will see rising costs for literally everything from gas and food to cars and housing.
Better wages? Well, not so much.
Original post from Real Clear Politics