I’m socially progressive, and lean center-left on economic policy. In fact, I’m with Biden on most U.S. policy issues (despite what I view to be the massive failure in Afghanistan).
I supported the American Rescue Plan, despite warnings from folks like Larry Summers, Olivier Blanchard, and Jason Furman that it might be inflationary:
- I thought the plan was mostly relief—rather than leading to an unprecedented spike in nominal spending, it would probably just be used to pay off debt and supplement savings.
- I thought it was pretty plausible the output gap (the gap between how much the economy could produce and how much it was actually producing -- if the gap is big, closing the gap wouldn’t cause inflation to increase) was being underestimated. After all, high inflation was pretty much unprecedented post-2008; it seemed like some combination of a global savings glut and a productivity slowdown meant consumers weren’t spending as much, while economists consistently underestimated how much more employment the economy could take without causing much inflation. I didn’t trust traditional economic models as much.
- Even if it was stimulus, I suspected that monetary policy would successfully partially offset its effect on an output gap, without too much hassle or major rate hikes.
- I thought some of Blanchard’s predictions, like <2% unemployment to accompany the high inflation, just seemed pretty intuitively implausible. This turns out to be a problem with traditional models in general: the U.S. has >3% unemployment, but still has pretty high core inflation.
In three of these four areas (#1, #2, and #3), I was dead wrong. So were many other liberals and progressives -- we vastly overestimated the economy’s ability to take money, as well as how expansionary the Fed was gonna continue being. It was a tough psychological shift for me. I was pretty frustrated in ~2017-18 with the apparent unwillingness of U.S. policymakers to push really hard for full employment; I attributed some of Trump’s victory, and the frustration of blue-collar workers, to insufficient willingness to spend in the economy (rather than more structural issues, like trade policy) -- and I continue to believe this. I thought, and continue to think, that the Fed being expansionary in 2019 averted a small recession, and the Fed’s response to COVID in 2020 was fantastic (as was the first relief bill, which caused poverty to decline in 2020). So now, on seeing high inflation -- which, more and more, wasn’t seeming like a transitory thing, nor a response to merely supply chain issues or gas prices -- I had to reckon with the downsides of deficit spending.
This is a real potential cost of the Democrats moving further left. Even though, on some margins, I welcome it (e.g., taking clean energy investments and R&D seriously, wanting more immigration, pushing for anti-poverty measures, and, relative to -- say -- 2015-16, a more pro-worker monetary policy), it’s undeniable that it’s time for the Fed to tighten (and the warnings of progressives like Elizabeth Warren against this terrify me) and for the U.S. deficit to reduce (as someone who hasn’t been particularly worried about deficits before). Moderate Democrats, by reigning in inflation, could be electorally stronger in an entirely different way now.
