Salesman Joe Takes To The Road; A New Look Fed; Nixonomics Redux

Roughly two out of three Americans polled by CBS News and YouGov say the Biden administration is not doing enough about inflation. Almost as large a portion of those disapproving of the President’s performance say their opinion of him would improve if he “gets inflation down”, whereas only 24 per cent say they would think better of him if he passes the Build Back Better entitlement program to which he has devoted his time, energy and political capital. Two out of three voters say Biden’s and the Democrats’ focus is on issues they don’t care about at all or care only very little about.

When polls reveal voters crying out in pain, democratic politicians take two approaches. The first is to deny the usefulness of polls, which Biden did at his press conference last week. The second is to respond to the polls with mid-course policy corrections, which Biden announced at the same press conference.

Getting Out Of This Place

The President’s first change will be to get out of Washington more, to explain to voters face-to-face, probably mask-to-mask, how infrastructure spending will increase productivity and lower costs and prices. And how his planned child tax credits and subsidization of child care will free up parents to re-enter the work force, easing pressure on wages. No hidebound stick-in-the-mud she, treasury secretary Janet Yellen supports the Biden programs as “modern supply-side economics”, which she contrasts with the “previous failed strategy for increasing growth.” Biden has a reasonably good story to tell; much depends on his ability to tell it. In any event, the images of such meetings will trump those of him tramping up to the congress only to be told “no” by other Democrats.

Diversity Comes To The Fed

Second, he is urging the Senate to confirm his nomination of Sarah Bloom Raskin, Lisa Cook and Philip Jefferson to the Fed Board of Governors.

·     Raskin, a professor at Duke University School of Law and a member of the Fed board from 2010 to 2014, would be vice chair for supervision – top cop in Wall Street vernacular — says it is the Fed’s job to mitigate the risks of climate change.

·     Cook’s academic work at Michigan State University centered on the effect of hate-related violence on U.S. economic growth

·     Jefferson, an economist at Davidson College, has focused on inequality, poverty rates and the role of education in reducing unemployment.

No use arguing that these areas are of no direct concern to a central bank; chairman Powell and treasury secretary Janet Yellen have already agreed they indeed are. Here is how those interests might play out in the making of monetary policy.

In The Lords of Easy Money, a highly readable study of the Fed, Christopher Leonard tells the tale of former governor Thomas Hoenig’s dissents to the decision to adopt Quantitative Easing (QE) and negative interest rates. Hoenig did not object to those policies primarily because he worried about inflation. Instead, he watched in horror as the Fed “printed a hundred years’ worth of money … in little over a year” between 2008 and 2010. “It would benefit a very small group of people who owned assets, and it would punish the very large group of people who lived on paychecks and tried to save money…. No single policy did more to widen the divide between the rich and the poor.”

It is arguable that the newly constructed board of governors, by elevating inequality to a more central place in the making of monetary policy, will tamp down inequality-creating QE. That would have the ancillary effect of cooling inflation. As would a decision to reflect Raskin’s climate concerns in determining the risk associated with bank lending practices, raising banks’ capital requirements and reducing their lending capacity.

Whether any of this – meeting with the President who, by claiming credit for the good performance of the economy also set himself for blame when things are going wrong – and jiggering the Fed board will be seen by voters as a solution to the rapidly spinning dials at the gas station, the rising cost of food, and empty supermarket shelves is doubtful.

Break Up The Monopolies

In addition to travelling more and making the Fed board more diverse – it would have two blacks and a four-woman majority if all nominees obtain the 50 senate votes plus the vice president’s tie-breaker –  Biden plans to unleash the antitrust authorities on concentrated industries that he says are raising prices.

“Capitalism without competition isn’t capitalism; it’s exploitation,” is one of Biden’s favourite aphorisms, and the meat processing sector, in which the four largest control 85 per cent, 54 per cent and 70 per cent of the beef, poultry and pork market, respectively, is his “textbook example” of the evils of concentration. The processors’ market power enables them to depress prices paid to farmers and raise prices paid by consumers claims the President. Evidence presumably to follow.

Even Biden-supporting columnist Paul Krugman concedes that monopoly behavior “can’t explain more than a small fraction of current inflation.” Still, Biden is surely right to call for more vigorous antitrust enforcement, although for reasons unrelated to the fight against inflation.

FTC chair Lina Khan is delighted to oblige the President who maneuvered her appointment through senate confirmation before mentioning that he intended to make her chair of the agency. Khan might have an excessively expansive notion of just how far she can stretch antitrust policy to reach social issues that trouble her, but she is surely right to be reviewing merger policy to make it fit for purpose in the economy of today, and to be taking steps to repair the damage created by her predecessors’ failure to consider all aspects of the market power of Big Tech.

MMT, Minimum Wage and Now Price Controls?

Not on the President’s list is a call for the sort of general price and wage controls instituted by President Richard Nixon when he took America off the gold standard, with no lasting effect on inflation. But a fast-paced march into the past is being organized by a group of left-leaning economists who are calling for sector-specific price controls that, they argue, can be designed to avoid past mistakes. The well credentialed (Harvard, Yale and King’s College, Cambridge, his father deputy head of the Office of Price Administration charged with price controls during WWII) James K. Galbraith, professor of economics at the LBJ School of Public Policy at the University of Texas, argues that the Reagan-Volcker team “succeeded against inflation … because they were willing to pay an enormous price: unemployment above 10 per cent…, a global debt crisis … and widespread deindustrialization… The Reagan-era policies also paved the way for China’s rise … [which] relied on price controls … allowing its industry to mature as America’s declined….. If inflation persists the government should step in to manage strategic prices…. The worst option is to punt the issue over to the Fed, which will raise interest rates and fight inflation by letting Americans be kicked out of work.”

Snicker not: Modern Monetary Theory (MMT), once considered an outlandish idea advocated by a small fringe of leftish economists who believe large deficits need not deter spending in a country such as ours, which has its own currency, is now a reasonable description of America’s fiscal policy. And a $15-per-hour minimum wage, once deemed a job-killer, is now near-pervasive in our full-employment economy.

Powell Heading For A Difficult Year

Containing inflation, especially once embedded in rising wage expectations, higher rents, while meeting his and the new appointees’ expansive view of the central bank’s remit – reduce income inequality, battle climate change – won’t be the proverbial walk in the park for the Fed chairman. Indeed, the Fed might already be late to the interest-rate game; the bond vigilantes already seem to have saddled up and be driving rates higher.

Agreeing on general goals is one thing. Translating that agreement into specific policies is quite another. Powell might find that the historic collegiality and consensus that have been the hallmarks of Fed conclaves have vanished, along with the traditional deference to the wishes of the chairman. The times they indeed are a-changin’.