Congress and Biden have to help the Fed fight inflation

ANOTHER VIEW

On inflation, President Biden's political self-interest matches the electorate's economic self-interest. Voters don't want the cost of living to go up; he doesn't want them to punish his party for it at the polls. However, Washington's inflation-fighting efforts "haven't yet made meaningful progress," as a Federal Reserve governor, Christopher J. Waller, recently conceded. In September, the consumer price index rose at an 8.2 percent annual rate, with "core" prices - for all goods except volatile food and energy - spiking 6.6 percent, the sharpest rise since 1982. In real terms, average weekly earnings have fallen by 3.8 percent over the past year, according to government data.

With Republicans running on the issue and likely to gain control of at least one house of Congress in November, but not offering much in the way of a concrete anti-inflation plan, it's important to ask what's fair, and unfair, to criticize about Mr. Biden's policies - and how he, and the next Congress, could do better.

Mr. Biden has done one big thing right. In May, he declared he would "respect the Fed, respect the Fed's independence." Monetary policy, the central bank's specialty, is the most efficient tool for fighting a phenomenon that results from too much demand chasing too little supply. Raising interest rates, as the Fed has done - to the tune of three percentage points since March - cools demand across every sector. Mr. Biden's hands-off approach to the Fed, despite foreseeable short-term pain such as lower stock prices, was a welcome contrast with his predecessor, Donald Trump, who used to demand publicly that Fed Chair Jerome H. Powell do his bidding.

As recent data suggests, though, the Fed could use some help. It needs an assist from areas of policy under presidential and congressional control: taxes, spending and regulation. Which brings us to the big thing Mr. Biden and the Democratic Congress did wrong: In March 2021, with post-pandemic labor shortages and supply-chain issues still constraining production, they goosed demand a bit too much in the deficit-financed American Rescue Plan, which was necessary, but at $1.9 trillion, too big. Along with the Fed's own mistake - continuing to ease financial conditions through bond-buying well after a recovery had already begun - the bill prompted Harvard economist and former treasury secretary Lawrence H. Summers to decry "the least responsible macroeconomic policy we've had in the last 40 years." Even if that assessment is a bit harsh, Mr. Biden's oversize spending plan violated the first rule of fiscal policy, relative to inflation: Do no harm.

The "do no harm" injunction is even more important now that interest rates are rising, and government can no longer borrow as cheaply as it did when the Fed was in easy-money mode. August's Inflation Reduction Act followed the rule, more or less. It would essentially offset hundreds of billions of dollars in new green energy spending with increased revenue and spending reductions - mostly through lower payments for prescription drugs in federal health-care programs. Still, the bill doesn't really live up to its name. The consensus among forecasters is that it will be roughly inflation-neutral; its first drug price control, a $35 monthly cap on insulin, does not start until next year.

What's more, the president immediately pushed in the opposite - inflationary - direction by announcing a student loan relief plan that could shower several hundred billion dollars on recipients, much, if not most, of which fuel demand for goods and services. Mr. Biden was quick to claim credit for the fact that the federal deficit fell from $2.8 trillion in fiscal 2021 to $1.4 trillion in fiscal 2022. Yet that was primarily due to the planned ending of pandemic- related emergency spending, and the deficit would have been almost $400 billion lower but for the Congressional Budget Office's need to account for the cost of student debt forgiveness.

The country does not need a wrenching transition to a balanced budget; to the contrary, that might help push the country into a recession, which could result from the Fed's rate hikes anyway. Nor are we denying that many factors beyond Mr. Biden's or Congress's control fueled inflation - especially Russia's war on Ukraine. Rather, what we are calling for is reasonable fiscal discipline. Until inflation is defeated, fiscal policy should push in the same direction as the Fed, with no new major spending that isn't fully or mostly paid for with higher taxes or reduced spending elsewhere in the budget. In fact, fiscal discipline could help the Fed achieve a "soft landing" out of the inflationary spiral. Minimizing federal borrowing would limit competition for funds between government and the private sector, which tends to drive up interest rates.

Some fiscal decisions Mr. Biden might face in the next year or two look easy. One would be to resist any effort by a new Republican majority to make permanent the Trump tax cuts, set to expire after 2025. Ditto for opposing any Republican attempts to hold the federal debt limit hostage to spending cuts, which could risk a U.S. debt default. More difficult for Mr. Biden, given the country's protectionist mood and geopolitical struggle with China, would be selectively easing tariffs on goods from China that Mr. Trump imposed. Still, he should do it: These levies are now probably doing more to punish U.S. consumers than Chinese industry.

Elsewhere on the supply side, the Biden administration needs to target outmoded regulations that restrict supply with no commensurate health or safety benefits. It has already done this regarding over-the-counter hearing aids, potentially saving consumers millions of dollars. Housing markets, long constrained by zoning and other rules, cry out for liberation, admittedly a job for local governments - but one that they might be more likely to take on if the president nudges them. If there is any area for bipartisan cooperation, consumer-friendly, productivity-enhancing deregulation might be it.

Inflation angers voters because it makes everything more expensive; it also fuels a broader feeling of government dysfunction and societal disorder. Getting it under control is urgent for this country's democracy - as well as its economy.

- The Washington Post