The return of inflation for the first time in my lifetime also means the return of difficult short-term tradeoffs in economic policy for the first time in the 21st century. To put it another way: The era of free-lunch politics is over — and it’s Republicans, even more than Democrats, who will have a hard time adjusting.
When George W. Bush was president, it was commonplace to hear Democrats complain about the irresponsibility of waging two wars while enacting two large tax cuts and an expansion of Medicare benefits. But the alleged problems with Bush’s largess were set to occur in the future, with debt burdening our children and grandchildren. In the near term, economically at least, everything was fine.
During Barack Obama’s presidency, political hysteria about budget deficits reached a fever pitch, but the failure to address them never generated any real-world problems. By the time of Donald Trump’s presidency, both parties had basically stopped worrying about tradeoffs. Trump cut taxes and raised spending, and disavowed any reforms to Social Security and Medicare.
Now President Joe Biden eschews any rhetoric about fiscal responsibility and simply proposes new taxes in order to finance new spending. Even though interest rates remain relatively low, inflation will bring an end to this kind of free-lunch policymaking.
For starters, it’s not clear how long rates can or will stay low — they are rising, and the US Federal Reserve is going to keep increasing them for a while.
Beyond the green-eyeshade aspect of it, the difficulty is that the US economy is now constrained by real resources. Policies such as student-loan relief, which could have been useful stimulus a few years ago, have become inflationary. Even tax cuts, unless offset by spending cuts that take money out of someone’s pocket, would fuel inflation.
By the same token, new spending on social benefits that puts cash in pockets will be inflationary unless it’s taxed away from somewhere else. While a few years ago Biden could have argued that his tough “Buy America” provisions for infrastructure projects were necessary to create jobs, today there is an excess of job openings.
To be clear: That strong labor market is a signature achievement of the Biden administration. But the nature of achievements is that, once you achieve them, you don’t need to keep on achieving them.
This administration, whatever its other shortcomings, has cured a chronic demand shortfall that has plagued the US for decades. Now it needs to pivot from progressive dreamscapes and toward a universe of hard tradeoffs. Deficit spending and protectionist regulations can no longer be justified as stimulus — and it’s not practical to fund programs by taxing the wealth or unrealized capital gains of billionaires.
In other words: Spending more in one area will require spending less in another. That can be done with taxation to reduce private spending — it can even be done with taxing the rich — but the base would need to be larger than the tiny groups targeted by these kinds of ideas.
If the end of free-lunch economics is bad news for the progressive left, however, it’s worse news for Republicans.
Both former President Bill Clinton and Obama successfully practiced forms of austerity politics, dramatizing for voters the tradeoffs between conservative tax policy and the stability and security of Medicare, Medicaid and Social Security. Bush’s political standing imploded when he tried to privatize Social Security, and Trump’s effort to pare back Medicaid likewise ended in tears.
Indeed, Trump was lucky to be president at a moment when much of the establishment had wrongly concluded that the US was at full employment. Under the circumstances, the mix he delivered — increased spending, lower taxes, and more restrictions on trade and immigration — led to mostly good results. But deploying the same policies in today’s radically altered situation would be extremely destructive.
Yet rising Republican stars have not come up with anything better. Successful Republican governors such as Florida’s Ron DeSantis and Virginia’s Glenn Youngkin are practicing free-lunch politics — tempering their culture-warrior schtick with increases in school funding and teacher salaries. They can do that because, perversely, the Democrats’ American Rescue Plan gave so much money to states and localities over Republican objections.
Six years into the Trump era, however, there’s been no new synthesis of economic thinking among Republicans, no meat on the populist bones. When National Republican Senate Campaign Committee Chair Rick Scott decided to write down some policy ideas, they were so politically toxic that Majority Leader Mitch McConnell has been disavowing them at every opportunity.
Yet all that stuff that former House Speaker Paul Ryan used to say about entitlement spending remains true. With the population aging, the price of keeping a constant set of Social Security, Medicare and Medicaid benefits in place is rising over time. Post-Trump Republicans, meanwhile, are more wedded than ever to a political approach that requires higher spending on the military and related matters like policing and border security.
Democrats actually have an answer to the question of how to pay for all that — raise taxes, mostly on rich people — even if they don’t have a realistic strategy for a transformation of American society. But Republicans really don’t have an answer. Ever since George H.W. Bush broke his “no new taxes” pledge and the party rebelled against him, the conservative movement has been coasting on free-lunch politics. Democrats have driven themselves batty complaining about the intellectual dishonesty of it, but in practice the economic situation has validated the Republicans’ refusal to make responsible fiscal choices.
Those days are coming to an end. For now, that’s Joe Biden’s problem. But it’s the GOP that has no solution.
Bloomberg
