Break out the eight-track tapes and the disco balls. Inflation in a time of unemployment and gas lines is suddenly giving the economy a decidedly 1970s feel.
These warnings haven’t caused Democrats to rein in their ambitions and pare back their spending plans.
We’re a long way from the stagflation of those bad old days under President Jimmy Carter, with the economy growing at a brisk 6.4 percent annual rate as the world reopens and the pandemic recedes. Still, a recent spate of bad economic news in what should be a fairly robust recovery is a warning that President Joe Biden and congressional Democrats’ approach to fiscal policy could reap negative unintended consequences.
Inflation picked up in April, according to federal data released Wednesday, with consumer prices jumping by 4.2 percent — the biggest increase since 2008. Former Treasury Secretary Larry Summers, a Democrat who advised Presidents Bill Clinton and Barack Obama, warned of a high “inflation scenario” that seemed unthinkable weeks ago. The economy added only 266,000 new jobs — barely more than a quarter of what had been expected with reopening jump-starting demand for work — and the unemployment rate ticked up to 6.1 percent.
Biden and congressional Democrats have insisted that as Covid-19 winds down, the federal spending spigots need to be opened up on the Keynesian theory that this is the quickest way to stimulate the economy. They have already enacted the $1.9 trillion American Rescue Plan, which followed two coronavirus stimulus packages with price tags of $2.2 trillion and $900 billion, respectively, last year.
After the latest Covid-19 relief, the president outlined an American Jobs Plan centered on infrastructure, with a cost of about $2 trillion. Before Congress could even take up that proposal, he added an American Families Plan featuring another $1.8 trillion for child care and additional social welfare spending.
“A billion here, a billion there, and pretty soon you’re talking real money” is the memorable (albeit possibly apocryphal) quotation attributed to longtime Senate Republican leader Everett Dirksen. We’re now up to a trillion, a threshold the entire federal budget didn’t reach until 1987.
Back in March, there were reports that even some on Biden’s economic team worried about too much deficit-fueled spending. His advisers grew “concerned that the plan could jeopardize the nation’s long-term financial stability,” according to The Washington Post. Big deficits could boost interest rates and make federal debt payments spike. That would further strain the budget, squeezing the discretionary domestic spending programs many key Biden voters rely on and support.
“It should now be clear that overheating — not excess slack — is the dominant economic risk facing the U.S. over the next year or two,” Summers said Wednesday. “My concerns about overheating have grown substantially over the last several months.”
But these warnings haven’t caused Democrats to rein in their ambitions and pare back their spending plans. They did decide to propose bigger tax increases to help pay for the proposals, but tax increases, even those carefully targeted at higher-income earners, aren’t cost-free, either.
The administration is contemplating raising the corporate income tax rate from 21 percent to 28 percent and imposing some of the highest capital gains tax rates in years. But companies and investors are trying to dig out of the economic ditch right now, so taxes could be counterproductive, because they make recovery harder for the business sector while potentially slowing the growth of the broader economy.
Then there’s the matter of enhanced unemployment benefits’ disincentivizing work, a possibility many liberal Democrats refuse to even consider despite the disappointing jobs report. These benefits surpass the financial reward of working for nearly half the unemployed, and employers are telling journalists and survey takers that they are making it difficult to attract workers even when they raise wages. A survey by the National Federation of Independent Business, for example, found that 44 percent of the 10,000 small-business owners it polled were having trouble filling job openings.
Republican-led states are beginning to cancel these benefits to entice the unemployed back to work. Some lawmakers, like Sen. Ben Sasse, R-Neb., have proposed converting the unemployment benefits into hiring bonuses. Even Biden has begun to emphasize that the unemployed can’t turn down “suitable” jobs and still collect benefits, even though the White House has denied a connection between the payments and the lackluster jobs report.
Democrats have generally argued that other factors, like the coronavirus and a lack of available affordable child care, loom larger in keeping potential workers idle, and they point to studies that downplay the connection between generous jobless benefits and continued joblessness.
All of those Democratic contentions would justify more spending, not less. But what if they’re wrong? The pandemic has hit smaller employers who still struggle the most to meet their bottom lines, which makes keeping pace with government benefits in paying prospective workers an additional challenge. “Mom and pop” shops have found it more difficult to navigate this challenging environment than Amazon.
The mix of joblessness and sluggish economic growth plus high inflation and interest rates doomed the tradition of Democratic big spending that Biden is trying to revive. In its place came the dozen years of Republican administrations that began with the Ronald Reagan revolution, followed by eight years of “New Democrat” politics in which Bill Clinton declared that the “era of big government” was over.
The economy has the potential to recover quickly from the pandemic, since most of what was holding it back were measures to slow the spread of the virus. That’s the good thing. But leaving the country awash in too much borrowed federal money, with would-be employers weighed down by taxes and consumers hit with skyrocketing prices, could keep us from the recovery American workers deserve — and bring back some economic problems we thought we had left in the era of shag rugs.