Partisan Hackery Blinds People to the Real Problem
Federal Reserve Chairman Jerome Powell recently went to Capitol Hill and testified before a House committee. The questions asked by Republicans and Democrats along with their accompanying spin once again spotlights typical partisan hackery in Washington D.C. And while Democrats and Republicans finger-pointed at each other, the real culprit got away scot-free.
From 2016 to 2020, Republicans were constantly trying to play up the economy. You’ll recall Donald Trump claiming it was the greatest economy in history. Meanwhile, Democrats were trying to play it down. Now, the roles have reversed. Since the Democrats own the economy now, they’re talking about the “great recovery,” while Republicans sound warnings.
In reality, nothing much has changed. The “greatest economy ever” under Trump was built on government borrowing and spending, and today’s post-COVID boom is also based on government borrowing and spending. The U.S. government ran trillion-dollar deficits with Republicans in control. And it continues to run trillion dollars today with Democrats in control.
During Powell’s testimony before the House Select Committee on COVID-19, Democrats on the panel took the opportunity to grandstand about the greatness of the economic recovery. In fact, it’s only great compared to how awful it was when state and local governments shut the economy down for the pandemic. Unemployment remains stubbornly high and inflation has run hotter than expected over the last six months.
Inflation was at the center of the committee discussion. Jerome Powell has consistently downplayed rising prices, claiming that price increases are “transitory,” due solely to supply chain disruptions and the sudden surge in demand as the economy has opened up. The Democrats latched onto this narrative. They have to. It’s their economy now. The Democrats don’t want to admit to an inflation problem because that would be a blemish on the allegedly booming economy.
On the other side of the aisle, Republicans went into attack mode. They suddenly discovered that spending trillions of dollars you don’t have might be a problem. GOP committee members tried to call out President Biden’s deficit spending as the driving force behind rising prices. They aren’t completely wrong. But they seem to have forgotten that up until recently, they held the budgetary reins. There was plenty of borrowing and spending going on during the Trump administration. In fact, the U.S. government ran close to a $1 trillion deficit in fiscal 2019 and over $1 trillion for the calendar year – long before COVID-19 reared its ugly head. Many of the Republican committee members voted for that spending.
If you step back and look at it objectively, the Republicans have no credibility on the spending issue because most of them gave Trump a pass when as President he spent trillions and handed out his own brand of stimulus.
The truth is borrowing, spending and running up deficits is a bipartisan game. The recent $1.2 trillion infrastructure deal recently announced by Biden was brokered by both Republicans and Democrats. Republicans pretend to hold the line on spending when they’re out of power, but when they hold office, they spend money just like Democrats. It’s simply politics as usual. Democrats and Republicans work behind the scenes together and fingerprint at each other in public.
And while they flip-flop back and forth – the real culprit – the Federal Reserve escapes unscathed.
Jerome Powell refereed the partisan bickering and got out of town without a finger pointed at him. In fact, the Federal Reserve makes the borrowing and spending via monetary policy and money printing. It serves as the engine that drives the biggest, most powerful government in the history of the world.
The central bank buys U.S. Treasuries on the open market with money created out of thin air (debt monetization). This creates artificial demand for bonds and keeps interest rates low. All of this new money gets injected into the economy, driving inflation higher. We see this playing out before our eyes as the Fed continues to expand the money supply by record amounts.
Powell never acknowledged the Fed’s contribution to the inflation problem. Meanwhile, nobody in Congress, not even the Republicans, were willing to point their finger at the Fed and challenge Powell.
Economist Milton Friedman once said inflation is anywhere and everywhere a monetary phenomenon. Many factors drive up the cost of goods and services in an economy, but increasing the money supply fuels the general upward trajectory of prices over time. If inflation is a monetary phenomenon, one has to wonder how the committee never bothered to challenge Powell on the Fed’s monetary policy.
The answer is quite simple: both parties need the Fed to facilitate their spending.
Don’t fall for the partisan hackery. The borrowing, the spending, the debt and the ensuing inflation aren’t all the Democrats’ fault. Republicans had their hand in it as well.
And the GOP isn’t going to ride in on a white horse and fix the problem.