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Biden Stimulus Failures Could Produce 1920s-Style Republican Victories

Michael Barone on

What's wrong with the economy? Nobody seems quite sure, but it's clear that the Biden administration's $1.9 trillion stimulus package passed in March, on top of the $900 billion approved in December, the last full month of the Trump administration, has not had the intended results.

Yes, the economy has grown, and so have wages. But the assurances of President Joe Biden, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell that inflation is just "transitory" grow less and less credible.

Warnings of this came not just from Republicans but from impeccably credentialed Democrats -- from former Treasury Secretary and Obama administration economic adviser Lawrence Summers and from Obama's Council on Economic Advisers head administration lead economic adviser Jason Furman.

Similar apprehension was expressed this week by Clinton administration domestic adviser William Galston in the Wall Street Journal and from Obama consigliere Steven Rattner in the New York Times. "Inflation isn't going away" is the headline of Galston's article. "Enough already about 'transitory' inflation," read the lead sentence in Rattner's.

Biden's policies, including another trillion dollars in the recently signed "infrastructure" bill and another few trillion in the Building Back Better proposal, seem based on policies that became standard operating procedure in the decades after World War II.

In those days, you got economic recessions when big auto and steel companies piled up inventories -- they didn't have computer tracking -- and laid off their blue-collar workers. I saw this growing up in Detroit in the 1950s, when my physician father's income dropped by half in the recession of 1957-58. Recoveries occurred when money was pumped in by Federal Reserve interest rates cuts or the Kennedy tax cuts.

 

But the American economy no longer operates like one giant factory. A better description is economist Arnold Kling's PSST theory, which argues the economy consists of numerous patterns of sustainable specialization and trade.

These were disrupted in two unfamiliar ways following the recession of 2007-09 and amid the COVID-19 restrictions of 2020-21. The recession came after 24 years of the "great moderation," with low inflation and substantial growth only briefly interrupted by two mild recessions.

Over that time, many patterns of specialization and trade had grown flaccid and stale. The fall 2008 collapse prompted firms to slough off what economist Tyler Cowen called "zero marginal product" operations and workers.

Democrats Summers and Furman attribute the sluggishness of the post-2008 economic recovery to the Obama administration's inability to pump more money into the economy. In contrast, they argue, this year, Biden Democrats overcompensated by pumping in too much.

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