San Francisco / May 27, 2021

 

The New York Times reports that tomorrow, President Joe Biden will announce his budget plan (link). His Administration wants to spend $6 trillion in 2022 and the annual spend will rise to $8.2 trillion by 2031. The proposed spending for 2022 will be the highest level since World War II.

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Biden wants to finance many important initiatives. He wants to build better infrastructure, strengthen the safety net, and deliver services to enable more Americans to live more comfortable and dignified lives. But his Administration must acknowledge the downside to this spending strategy. Treasury Secretary Janet Yellen has been pushing a theory that we are in a "low inflation" economy where higher government spending does not necessarily raise consumer prices, interest rates, or introduce spikes into the bond market. But we are now seeing signs of inflation from Biden's prior stimulus spending.

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Consumer prices increased by 4.2% YoY in April. This was higher than expected and caused Fed Vice Chairman Richard Clarida to say "I was surprised" (link). High spending by the LBJ Administration caused painful inflation in the 1970s that stunted economic outcomes for American families at all income levels. The Democratic Party should focus on real-time evidence from the market and make the spending plans as simple as possible. The best government spending creates practical outcomes that do not develop in the private sector.

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One problem is that Secretary Yellen does not have significant practical experience in markets. The best Democratic Treasury Secretary in recent decades was Bob Rubin. He was a very successful trader at Goldman Sachs. He learned to adapt to real-time information from the market. There are many liberal strategists in the Treasury Department who have significant private sector experience. They share liberal values on what government programs and objectives are meaningful, but they have a sharp sense of the market tradeoffs. Yellen should listen to them, not academic theory suggesting we are in a "low inflation" economy.

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The Biden Administration wants to get re-elected in 2024. If his spending plan triggers inflation that voters "feel" harms their lived experience, that will reduce his chances in 2024. Biden should adapt his plans now.