Inflated Expectations Wrap
I started the week with the intention of finishing the revisions to a script that I had intended to complete over the weekend. I ended the week with those revisions still in progress.
The world was kind of like that too.
The End of the Free Lunch
My one column at The Week this week was about inflation and its impact on the Biden agenda:
The CARES Act and American Rescue Plan between them added $4.1 trillion to federal spending, with over a trillion dollars more spent on other COVID-related initiatives. That spending both pulled the economy sharply out of free-fall and prevented massive human suffering, and while the deficit exploded there was no obvious economic downside. The stock market recovered sharply and the poverty rate actually fell during the pandemic. It looked like the biggest free lunch in history.
That free lunch is no longer on the menu. With the inflation rate rising to a 30-year high, the Federal Reserve is going to have to accelerate its tapering and even look to rate hikes if it wants to retain its hard-won reputation as the guarantor of price stability. The bond market is certainly signaling that expectation, which means that if the Fed fails to deliver, inflation expectations could rise rapidly, with much worse consequences for the economy. If interest rates do rise, though, then the interest cost of future deficits will once again become a factor in budgeting, constraining future spending and putting a drag on the economy.
Does that mean "Build Back Better" has to be deferred, as Senator Joe Manchin has argued? Not necessarily. It's worth noting that Larry Summers, a prominent critic of the size of the second COVID relief bill, continues to advocate for passing the reconciliation bill, pointing out that it is only one-tenth the size of the American Rescue Plan, which it is fully paid for, and that it addresses important societal needs.
The prospect of higher inflation and higher interest rates doesn't preclude new spending. It just means that it isn't free. It needs to be paid for — and how it is paid for matters as much as whether it is paid in full.
Basically, the Democrats have three options looking forward.
One option would be to do what European countries do and pay for further expansions of the welfare state with broad-based taxes on consumption. That’s a sensible approach in general inasmuch as it gives benefits a broader political and fiscal basis of support. But in the current macroeconomic climate, it’s also the best way to deliver those benefits without further goosing inflation. The problem is that broad-based consumption taxes are wildly unpopular, in part because both parties have coalesced on an understanding of taxes that sees them as punishment rather than a contribution to the general welfare.
Taking that fact into account, another option, which Matt Yglesias argues for, would be for Democrats to trim their sails. That’s often sensible political advice—but it would be a bitter pill for Democrats to swallow when staring down massive losses in the House and Senate, particularly when the prospects of retaking the Senate in the short term are so poor. “Popularism” was supposed to mean dropping language and, to some degree, programs with limited appeal in order to be able to pass economic and social reforms with a much larger impact. If those reforms are also off the table though, one really has to wonder what’s left.
The last option, advocated by Noah Smith, is to pass their entire agenda, and let the Fed handle inflation. The problem with this approach, I believe, is that it raises the stakes for the Fed, and therefore makes them fight all the harder. If fiscal policy starts to adjust to an inflationary environment, the Fed can use that fact to justify their own cautiousness about reversing course. But if it’s clear that the Treasury and Congress are going to ignore inflation as they make policy, the market will recognize that fact, and demand a far more vigorous response from the Fed. Which, in turn, would be more likely to trigger a recession. In addition to the harm done to the country, that would also be terrible for Democrats’ political hopes, not only for Congress but for the White House—and justifiably so.
I don’t know which choice is political wisest, but and neither, I suspect, do the key decision-makers who are far more informed than I am. But unless we get into a war with China (God forbid), I do think this is pretty much the whole ball of wax right now.
Finally, I’m just going to leave this here:
Back to School
My only post here this week was about the much-ballyhooed and much-denounced announcement of the founding of a new institution of higher education, the University of Austin, with a board stuffed with a whole bunch of people familiar from On Here:
It doesn’t sound like a normal university for a host of reasons. The program doesn’t sound like it will offer traditional degrees in academic departments. They don’t plan to wait for accreditation to offer programming, which means people who sign up at least initially won’t be getting a “degree” with any market value. Nor does it sound like the institution will be researched-focused in the manner of a traditional university; it’s not even clear whether they will have a proper dedicated faculty. Rather, what it sounds like they’re going to offer is a program that brings various luminaries in who have other, full-time positions—as academics, journalists, entrepreneurs, what-have-you—to do stints teaching classes, with a staff whose function is to plan a slate of such offerings and an advisory board from whom a starting lineup of tutors could be drawn.
It doesn’t sound like Trump University though because it’s quite clear that they’re not trying to sell you on the monetary value of their offering, which is a pretty weird choice for a scam to make. Trump University claimed it would teach you how to get rich in real estate. The University of Austin is promising that it will give you experience in learning how to think, in the company of and tutored by already-accomplished thinkers. That might turn out to be a glorified TEDx or an even less-edifying intellectual circle jerk—it’s too soon to say. But it’s less obviously a scam aimed at separating marks from their money than many accredited masters programs at legitimate academic institutions are.
What it really sounds like is Substack.
The World Elsewhere
If you fret about the prospect of war with China, as I have been for a good many years now, I encourage you to read this piece by Aris Roussinos reviewing Elbridge Colby’s new book, The Strategy of Denial: American Defense in an Age of Great Power Conflict. Colby is a smart, tough-minded realist who rightly views the rise of China to near peer-competitor status as by far the most important geopolitical fact of the era, and amply worth subordinating all other foreign policy questions to—not only our ambitions in the Middle East, which is a frequent talking point, but also our core commitments to Europe. He’s to be applauded merely for the willingness to make those kinds of choices explicit and declare himself, and anyone who disagrees with the particular choices he makes owes it to him to be similarly direct.
Which is why the aforementioned review is so alarming, at least to me: because it makes Colby’s actual prescriptions for how to handle China sound, well, bonkers. If you want to know what sailing right into the Thucydides trap guns blazing looks like, this is pretty much it. I can’t vouch, however, that Roussinos has done Colby’s book justice, as I haven’t read it yet. It’s now even higher on my list than it was before.
If you want a more traditionally pessimistic dose of realism, meanwhile, I encourage you to read this piece by John Mearsheimer in Foreign Affairs. I think Mearsheimer errs in imagining that there was ever a realistic prospect of the United States deliberately sabotaging China’s economic growth in order to remain secure as top nation. Such a policy would have aroused the unanimous opposition of all of our allies and trading partners as well as the entire American business community. We might have gotten away with not granting permanent most-favored nation trade status for a number of years, but the pressure would only have increased year after year as European and Japanese businesses gained an advantage over America in the world’s largest market. But we certainly could have spent the past thirty years with our eyes open, and while it might be too late to avoid the return of tragic great power politics (as I suspect it always was), it isn’t too late to open our eyes and see what that implies.