By Zachary Halaschak, Economics Reporter
Democrats inside and outside the White House disagree with the Biden administration’s official line that the pandemic and supply chain struggles are the sole drivers of the country’s inflationary woes.
Problems on the supply side of the economy have driven up prices. But high-profile Democratic economists say the Biden team is wrong not to acknowledge the central role government spending and loosened monetary policy have played in raising inflation, which stood at 7.5% in January as measured by the Consumer Price Index. Other more liberal Democrats, meanwhile, argue the White House should publicly blame corporate greed for higher prices.
The fiercest criticism has come from prominent Democrats who blame excessive spending and money creation for inflation rising well above target.
“Biden keeps blaming the supply chain for inflation. That’s dishonest,” blared the headline of a New York Times op-ed written by Steven Rattner, a counselor to the treasury secretary during the Obama administration.
Rattner, a Democrat, highlighted a recent interview in which Biden insisted the reason for the inflation, which has reached its highest level since 1982, is because the supply chains were cut off. Rattner called the assertion “simplistic and misleading” for several reasons, including that supply chains are not “cut off,” just strained.
“Blaming inflation on supply lines is like complaining about your sweater keeping you too warm after you’ve added several logs to the fireplace,” he wrote. “The bulk of our supply problems are the product of an overstimulated economy, not the cause of it.”
Rattner, now the chairman and CEO of Willett Advisors LLC, added that the bulk of U.S. supply chain problems aren’t because of the pandemic but rather because people are out and spending more money — including money provided during several rounds of government pandemic aid.
Larry Summers, a Democrat who served as treasury secretary under President Bill Clinton and director of the National Economic Council under President Barack Obama, has also consistently warned the government is generating too much spending.
“We had an economy where income was running short by $50 billion a month because of the pandemic, and we injected $150 billion to $200 billion a month into that economy. It’s perhaps not surprising that that’s led to an overflow of demand, which has generated inflation that on the CPI [Consumer Price Index] measure has risen to 7%,” Summers said to the Harvard Gazette earlier this month.
More than a year ago, as Biden proposed his massive $1.9 trillion COVID-19 stimulus bill, Summers raised questions about how the further infusion of cash into the economy, just months after the two stimulus bills pushed by former President Donald Trump, would affect inflation.
He cautioned in a February 2021 op-ed that the legislation could “set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”
Summers warned the Federal Reserve would not be able to tighten monetary policy fast enough to respond to the increase in demand.
The Fed, helmed by Chairman Jerome Powell with Biden’s blessing, is now facing intense scrutiny over perceptions it has been behind the curve in combating inflation.
The central bank sanctioned unprecedented measures to ease monetary policy after the start of the pandemic nearly two years ago. Those measures included lowering its interest rate target to zero and buying massive quantities of government bonds.
Throughout 2021, Fed officials insisted upon keeping the federal funds rate at its rock-bottom level and refused to begin tapering until the year was nearly over. Despite seeing inflation continuing to tick upward, Powell and the Fed maintained the assertion that higher prices were merely “transitory,” a phrase since tossed to the wayside.
The Fed, which once predicted it would not hike rates until 2024, is now trying to make up for lost time and is planning several rate hikes this year in response to the higher price. The agency is even weighing a half-percent rate hike next month, which would be the first time the central bank has taken such a drastic move in more than two decades.
The White House’s defense, though, is that countries that have not engaged in similarly large stimulus programs have also seen high inflation in recent months.
But Jason Furman, a Harvard economist appointed by Obama to serve as chairman of the Council of Economic Advisers, has rejected that argument.
“The United States has had much more inflation than almost any other advanced economy in the world,” he said.
Furman, a Democrat, told the New York Times the big difference between the more exaggerated U.S. inflation and that of other developed nations is that “the United States’s stimulus is in a category of its own.”
An argument that hasn’t been embraced by those at 1600 Pennsylvania Ave. is popular among some on the leftward flank of the Democratic Party: that greedy executives and corporate consolidation are behind the higher prices. Socialist Sen. Bernie of Vermont and Sen. Elizabeth Warren have championed the concept.
“One clear explanation for higher inflation? Giant corporations are exploiting their market power to further raise prices. And corporate executives are bragging about their higher profits,” tweeted Warren, a Massachusetts Democrat, just last week. “We need to boost competition and break up these monopolies to bring down prices.”
But top economists at the White House don’t seem to be buying that argument.
Prepared congressional testimony of a White House official included remarks marrying inflation to monopolization and corporate consolidation, although that passage was later stricken under objections by members of the White House Council of Economic Advisers, the Washington Post reported this week.
Democratic pollsters have reportedly advised the administration the message of blaming inflation on corporations goes over well with voters. But White House economists have rejected the idea, and Summers has also pushed back on the concept.
“Business bashing is terrible economics and not very good politics in my view,” Summers said.
The Biden administration and the Fed are also facing flak from Capitol Hill, where Republicans have been largely rebuking Biden and congressional Democrats for last year’s spending spree. Some GOP lawmakers have expressed disappointment in how long it has taken the Fed under Powell to reverse its monetary policy.
Last year, before inflation was even as high as it is now, Rep. Kevin Brady, the top Republican on the Ways and Means Committee, told the Washington Examiner the Fed “helped create” the inflationary problems the country is grappling with now.
“I’ve been very disappointed in Chair Powell this year,” the Texas lawmaker said. “He and the Fed dismissed both the labor shortage and then the real dynamics surrounding inflation for far too long — they’re just finally catching up with it.”