First, see Inflation Is Stuck. Can Trump Unstick It? Trump has promised to tame prices. But even a president can only do so much by Justin Lahart of the WSJ. Excerpts:
"The
problem presidents face with inflation is that there is only so much
they really can do to cool it off. Bringing overall prices down would be
even harder—and unwelcome. Falling prices, or deflation, would make it harder for borrowers to repay their loans, stifling the economy.
Many
of the measures that economists might prescribe to reduce inflation,
such as increasing innovation, reducing regulatory burdens or boosting
the U.S. workforce’s skills, would take years, if not decades, to bear
fruit.
The effectiveness of past presidential efforts to control inflation has been mixed. Inflation cooled in response to Richard Nixon’s price controls and then burst higher when those controls were removed. Gerald Ford’s “Whip Inflation Now” campaign was widely derided. Jimmy Carter
persuaded the Fed in March 1980 to introduce stringent controls on the
use of credit, tanking spending and leading to large job losses. The
controls were removed that July.
There
are also plenty of things outside the president’s direct control that
can raise prices. Think supply-chain disruptions, natural disasters,
far-off wars or Fed policy mistakes.
Consider
Trump’s promise to reduce energy costs through faster permitting and
weaker environmental regulations—to “drill, baby, drill.” Trump’s oil
and natural-gas supporters love his antiregulatory bent, but they don’t actually seem as eager to drill more. A fossil-fuel glut
during Trump’s first term caused debt strains for many drillers,
leading them to focus more on returning capital to shareholders than
investing in new production.
Even
if U.S. oil production, which has been at a record high, doesn’t move
up meaningfully, energy costs might still be poised to fall as a result
of factors outside the U.S. The International Energy Agency last month
lowered its oil-demand-growth projections for 2025, citing “below-par
underlying global economic conditions, as well as clean energy
technology deployment.” Oil production, meanwhile, looks poised to rise,
“so what you have is too much oil chasing too few consumers,” said the
energy economist Phil Verleger."
Then see Cutting the Deficit Is Easy—It’s Just Unpopular Bureaucrats aren’t driving the deficit. The culprit is the checks they send out that people happen to love by Greg Ip of The WSJ. Excerpts:
"The federal deficit reached $1.8 trillion, or 6.4% of GDP, last fiscal year, a record outside of war, recession or emergency."
"Spending is popular with voters and both parties. This is why
commissions, think tanks and earnest outsiders have been papering
Washington for decades with ideas to cut spending and the deficit—and
mostly gotten nowhere."
"Salaries for all civil servants
cost around $200 billion to $250 billion a year—or roughly one-eighth
of the deficit—and more than 60% of them work for military or
security-related agencies"
"the big money isn’t tied up in the people who work for the government,
but in the checks they send out. And the checks are much more popular
than the people."
"the Education Department . . . spent more than half of last year’s $274 billion budget on loans and
grants to students. The Transportation Department spent half its $117
billion budget on checks, mostly to state and local governments, for
highways, bridges and other infrastructure."
"Federal spending falls into three categories. First, interest on the
debt, at $882 billion last year. Not much you can do about that without
defaulting. Second, discretionary spending, which gets authorized each
year by Congress."
"It covers defense plus most of the federal services Americans encounter
day to day, from the National Park Service to the National Weather
Service."
"Third, mandatory spending: this is for programs that continue each year
without new authorization including Social Security, Medicare, Medicaid,
Affordable Care Act subsidies, food stamps, welfare, child tax credits,
veterans’ benefits and pensions."
"At $4.1 trillion, mandatory is more than double discretionary spending
and, because of population aging and health costs, growing much faster."
"Medicare, for instance, spent $12 billion last year on administrative
expenses. Can that be reduced? Maybe. But it’s just 1% of total costs"
"taming mandatory spending means reining in benefits."
"There’s a misconception that because such spending is mostly determined
by the authorizing law, it’s on autopilot. In fact, presidents have a
lot of discretion in how they interpret the law."
"Perhaps no president has exercised this discretion as brazenly as President Biden. He reversed an Obama era interpretation of the Affordable Care Act to expand subsidies to families, at a projected 10-year cost of $34 billion."
"The new president can restrain deficits unilaterally by undoing Biden’s
executive actions. The nonpartisan Committee for a Responsible Federal
Budget has identified
up to $1.4 trillion in such potential savings. Some, like student debt
cancellation, have already been halted by courts, but plenty of others
remain."
"Last month, Biden handed Trump a golden opportunity when he proposed that Medicare and Medicaid cover anti-obesity drugs. Biden officials say this would cost $36 billion over a decade, but PWBM puts the cost at $140 billion based on the big boost to utilization when other drugs gained similar coverage.
The
rule can’t be completed until after Trump’s inauguration, which means
he can prevent up to $140 billion in new federal spending by simply not
implementing the rule."
"a majority of voters want Medicare to cover anti-obesity drugs, as do 120 legislators from both parties."
Looking at these two issues reminds me of a post from 2022: To Solve Inflation, First Solve Deficits, This Theory Advises: Expect to hear more about the fiscal theory of the price level as governments struggle with rising debt and inflation.
By Greg Ip of The WSJ. Excerpts:
"But fiscal and monetary policy aren’t so easily separated.
After all, fiscal stimulus had some role in pushing inflation up, and
as the Fed raises interest rates to combat that inflation, it will
worsen deficits. Britain had to abandon deficit-financed tax cuts over fears they would drive inflation and interest rates higher."
"The fiscal theory of the price level (FTPL), as it is known, argues that
monetary and fiscal policy don’t just interact; they are, ultimately,
inextricable. If fiscal policy is irresponsible, even a responsible
central bank can’t control inflation."
"In a 1981 paper, though, Thomas Sargent (like Mr. Friedman a future winner of the Nobel Prize in economics) and Neil Wallace
challenged this orthodoxy: A government that runs unsustainable
deficits will, one day, fail to sell enough bonds, at which point the
central bank will have to finance the shortfall by printing money. The
central bank may initially try to control inflation by raising interest
rates sharply. But this will widen deficits further and ultimately make
inflation even harder to control. “Persistent high inflation is always
and everywhere a fiscal phenomenon, in which the central bank is a
monetary accomplice,” wrote Mr. Sargent, currently a professor at New
York University and a senior fellow at Hoover Institution, in 2013."
"The public will anticipate this eventuality long before it happens and
act in ways that drive inflation up now, not in the future, argues
Hoover Institution economist John Cochrane, author of “The Fiscal Theory
of the Price Level,” a 558-page examination of the theory to be
published next year."
"Thus it’s not the money supply but the government debt, and whether the
public expects it to be repaid, that determines inflation"
"the distinction between money issued by the central bank and bonds issued by the Treasury becomes irrelevant."
"But FTPL is frustratingly difficult to apply to real life. Debt soared
after the 2008 financial crisis yet inflation fell, instead of rising as
FTPL might imply. Responding to Mr. Bianchi, Ethan Ilzetzki of the
London School of Economics noted that Japan has by far the highest debt
among major advanced economies, but the lowest inflation. FTPL, he said,
is “a ticking time bomb that (so far) refuses to detonate.”
"Mr. Cochrane said FTPL can explain these results:
Japanese savers are willing to lend to their own government at rock
bottom interest rates, which makes future debt service and deficits less
burdensome. Rising debt after 2008 did put upward pressure on inflation
but that usefully offset the threat of deflation from soaring
unemployment, he said; the balance of these opposing forces yielded a
low, positive inflation rate. Mr. Cochrane acknowledges FTPL doesn’t
provide a clear-cut debt level at which inflation takes off: “You get
more inflation when you get more government debt than people think the
government can or will repay.”"
"Sargent and Wallace wrote back in 1981 that fiscal policy doesn’t always
dominate monetary policy; sometimes the opposite happens."
"In the U.S., FTPL’s greatest value may be as a reminder to Congress and
the Fed to pay attention to each other. Said Mr. Cochrane: “The
bottom-line message is…that fiscal and monetary policies always have to
work together.”"
Related post:
How Government Spending Fuels InflationExcerpt:
"The new theory holds that when the overall amount of government debt
is more than people expect the government to repay, we see inflation.
The price of everything goes up, and the value of the dollar declines.
How does this work? “The U.S. government has $20 trillion of
debt outstanding,” Mr. Cochrane says. “That means, over the long run,
people must expect taxes to exceed spending by $20 trillion to repay the
debt.” But if they think the government will be able to pay back only
$10 trillion in today’s money, “people will try to get rid of their
government debt fast, before it is worth less. They try to sell it in
order to buy other things,” driving up the price of everything else.
“That keeps going until all prices have doubled—until the $20 trillion
promise is only worth $10 trillion at today’s prices.”"
