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Inflation hawks are dead wrong

Have you heard that inflation is raging and is likely to destroy Biden’s presidency? Have you heard Senator Joe Manchin complain about the spending in Biden’s BUILD BACK BETTER BILL? He argues that spending so much money is likely to make the inflation worse and speed the “bankruptcy” of Social Security and Medicare trust funds? Here is a Bloomberg (November 4) article with quotes from Manchin:

“When Senator Joe Manchin says President Joe Biden’s $1.75 trillion social spending package will worsen inflation and leave the most basic government services like Social Security and Medicare in danger, he’s reflecting the fears of his aging and vulnerable West Virginia constituents.

[ME: On the contrary he is creating those fears where none should exist!]

“Manchin has been one of two major holdouts imperiling Senate passage of Biden’s so-called Build Back Better legislation, which includes universal pre-kindergarten, child-care subsidies, and, possibly, paid family leave and free community college, as well as addressing elder care and prescription drug prices. It also includes measures to address climate change

“Last week’s latest inflation report showing prices rising 6.2% over one year ago brought a fresh statement of opposition from West Virginia’s senior senator, who said that Washington “can no longer ignore the economic pain Americans feel every day.

“I have a lot of elderly people,” Manchin, 74, said at a recent speech to the Economic Club of Washington, D.C. “If Social Security and Medicare is not solvent and the trust funds are not solvent, then you’re taking away a lifeline that people have right now. Why should I expand all these social services when I can’t even pay for what we got?”

[see Gregory Korte: “Inflation-Wary Manchin Voters Put Biden’s Agenda in Peril,” November 14, 2021, Bloomberg.com,” available at https://www.bloomberg.com/news/articles/2021-11-14/inflation-wary-manchin-voters-put-biden-s-agenda-in-peril]

There are so many things wrong with what Manchin said that I hesitate to go into detail but I feel I have to. First of all, check out what Build Back Better includes. Universal pre-K with limits on out-of-pocket costs will REDUCE the cost of living. So will paid family leave and free community college. And the ability of Medicare to negotiate drug prices with Big Pharma would put a tremendous dent in inflation – and by the way, make the Medicare trust fund more solvent in the long run.

[There are a lot more elements of the Build Back Better Bill that will reduce inflationary pressure. For details, see the memo from Speaker Nancy Pelosi at https://mail.google.com/mail/u/0/#inbox/FMfcgzGlksJGxzfvLLfJcxDGKnMWfKld?projector=1&messagePartId=0.1]

Manchin’s hysteria about the “insolvency” of the Medicare and Social Security trust funds is just that -- -hysteria. The trust funds for full social security pension benefits will be fine until 2034. If NOTHING is done, benefits in 2035 will be cut by 22% which seems like a lot but by 2034, the wage base on which social security pensions are calculated will be significantly higher than it is now. And even more important, Congress will not permit social security to be cut by that amount --- the elderly who vote in large numbers would never stand for it. Between now and 2034, revenues will be raised.

One should ask Senator Manchin – how is a big increase in government spending today going to bankrupt social security trust funds in 2034?? Higher incomes and higher levels of employment between now and 2034 as a result of spending as in Biden’s Build Back Better plan will increase the revenues flowing into the Social Security trust funds putting more life into those funds.

As for Medicare, a fascinating chart presented by the Commonwealth Fund shows that over the years, the life of the Hospital Insurance Fund (Medicare Part A – totally financed by payroll taxes) has jumped around. Currently it is only four or five years but in the period after 1998 it jumped dramatically with the passage of a balanced budget act. The same thing happened when the Affordable Care Act was passed in 2010. (Just in one year the life expectancy of the Hospital Insurance Fund jumped over 10 years.). The long run solvency of the Medicare Trust fund depends in large part on what happens to medical cost inflation --- which would be cut down to reasonable levels if Congress would pass Medicare for All. [For the chart see Gretchen Jacobson and Lovisa Gustafson, “Putting Medicare Solvency Projections into Perspective,” available at https://www.commonwealthfund.org/blog/2021/putting-medicare-solvency-projections-perspective Commonwealth Fund Blog, September 1, 2021]. Absent that, there will undoubtedly be fixes because as with Social Security pensions, America’s seniors will not stand for substantial cuts in Medicare coverage.

[Probably the easiest way to cut government spending on Medicare is to reduce the outrageous overpayment that the government makes to private insurance companies that offer Medicare Advantage plans. Though highly popular with seniors, they end up ripping off Medicare. See Thom Hartmann, Medicare Advantage Is a For-Profit Scam. Time to End It.(September 1, 2021) available at https://www.commondreams.org/views/2021/09/08/medicare-advantage-profit-scam-time-end-it. Hartmann notes, The National Bureau of Economic Research (NBER) compared Medicare Advantage with traditional Medicare and found the Advantage programs to be mind-bogglingly profitable: "MA insurer revenues are 30 percent higher than their healthcare spending. Healthcare spending for enrollees in MA is 25 percent lower than for enrollees in [traditional Medicare] in the same county and [with the same] risk score." If Medicare would stop financing the private insurance companies who offer Medicare Advantage Plans and instead stick with Medicare Part B (funded by premiums and general revenues) and leave it to seniors to find their own private plans that fill the gap left by Medicare Part B, they would save the taxpayers hundreds of billions of dollars over the next decade.]

Joining Manchin in the inflation-is-a-danger chorus, is the so-called financial guru Steve Rattner. He weighed in on November 17 (the day I recorded this commentary) with an OP ED in the NY Times which warned that the inflation that we are experiencing today is being “baked in” to predictions --- of what?? --- of what the FED will do in the middle of next year.

[Rattner’s OP ED is available at https://www.nytimes.com/2021/11/16/opinion/biden-inflation-spending-manchin.html. His career has been a revolving door between government and the top of the financial food chain – Lehman Brothers, hedge funds, etc. These folks make their money by charging interest on the loans they offer – so naturally inflation is something they are opposed to. Creditors LOSE when inflation goes up --- borrowers GAIN.]

Rattner also took a “victory lap” in his OP ED because he (along with former Treasury Secretary Lawrence Summers) had predicted that inflation at the end of this year would be higher than the consensus forecast had been. He was right but for the wrong reason – and his continued warnings about long run inflation is contradicted by “the markets.”

If borrowers and lenders believe that inflation is going to stay high, the lenders would insist on building an “inflation premium” into the interest rates they charge and borrowers would be willing to pay them. Right now, interest rates have shown no jump in response to the 6.2% inflation rate in October which means the thousands of borrowers and hundreds of lenders do not agree with Rattner’s and Summers’ dire predictions. On the night of November 17 when I wrote this version the prime rate (the rate banks charge their most reliable customers) was 3.25 percent. The 30-year fixed rate mortgage averaged 3.5 percent while the 15-year fixed rate mortgage averaged 2.6 percent. If inflation stayed six per cent for two years, all lenders who agreed to these terms would be losing between 2.5 and 3.4 percent a year as inflation eroded the value of the principal of the loan. In other words all these decision makers believe that the current spike in inflation will be transitory.

Economist Dean Baker has a detailed rebuttal to both Summers and Rattner. See “NYT Gives Steven Rattner a Victory Lap on Inflation Prediction,” available at https://cepr.net/nyt-gives-steven-rattner-a-victory-lap-on-inflation-prediction/

Anyone who wants can read it there. Baker’s conclusion is the same as mine --- there is no reason to scale back the Build Back Better bill because of long run inflation fears.

Once again, the journalists and pundits have it all wrong. --- And Manchin and Rattner are DEAD WRONG as well. Yes, inflation has been higher this year than any time since 1990 and if that inflation were SUSTAINED at this rate for two or more years, it would start to create difficulties. But even that would be totally manageable. Remember, inflation averaged over 7 percent in the period 1970-79 and the economy grew, created millions of jobs and was in fact more successful than the next decade which beat inflation with unacceptably high average unemployment. [For the numbers to back up that assertion see my book Surrender, How the Clinton Administration Completed the Reagan Revolution  (University of Michigan Press, 2000 (pbk) available for free on line.) See especially chapter 8 and the Appendix on page 169.]

I spent a lot of time as an economics professor challenging my students to discuss whether or not inflation as a problem had gotten a bum rap. I would argue that the reason economists make inflation out to be a problem on the same scale as unemployment is because bankers have too much influence on journalists and economists. As I noted above, inflation harms creditors and rewards debtors. IF I borrow 10,000 and my income keeps up with inflation, when I pay that same 10,000 back its purchasing power has declined. The real rate of return on lending money is the nominal interest rate charged MINUS the rate of inflation over the life of the loan. Thus, the important thing about whether inflation harms ordinary people is to check out whether wages have increased more than average prices so that at the end of the day --- or month or year --- people who work for a living are better off.

That brings us to today. Let’s remember that the majority of people have seen their incomes rise at a significantly higher rate than prices over the last year or so. This is because of the expanded unemployment benefits, the expanded child tax credit and the $1400 subsidy to people with incomes below $75,000 --- all of which were in the American Rescue Plan Act passed by Congress in March of 2021.

Rattner of course, considers this bill a major sin against sound economic policy because it was passed as a pure expansion of the deficit. And yes, in 2020, the federal deficit as a percentage of GDP (the actual number means nothing it must be presented in relation to GDP) was the highest since World War II. However, despite the bill that Rattner complains about, the total deficit and the deficit as a percentage of GDP is lower in 2021 than last year. During World War II, the deficit ended up over 25% of GDP --- Well, isn’t the fight against the pandemic a war? 776 thousand Americans have died from COVID in less than two years. During World War II, over the four years of American combat, the death toll was a bit more than 292 thousand.

But the worst sin Rattner commits against sound economic reasoning is to suggest that the deficit increases voted last March caused the inflation spike this past October. As Baker and most economists make clear, the inflation is a temporary problem caused by supply chain disruptions that resulted from the severe cutbacks in production that occurred when the pandemic hit which left many businesses without the ability to quickly ramp up production when the economic recovery began at a stronger rate than most analysts predicted – and that faster than expected recovery is a GOOD THING.

[For an analysis of the causes of the current spike in inflation see: https://mail.google.com/mail/u/0/#inbox/FMfcgzGlkrzBtqxRhcxtMJfdlkwbLjNr]

I asserted above that since the recovery began, a majority of the population has seen their incomes rise faster than the rate of inflation. Let’s get specific. Before the American Rescue Plan Act was passed in March, the Child Tax Credit was $2000 and because it was only partially refundable, many families only got $1400 per child.

[A “refundable tax credit” means that if your tax burden is less than the credit, you get a check from the IRS to cover the difference. A non-refundable credit means if your income is so low you pay no taxes, the credit gives you nothing!]

The law increased the credit to $3000 per child ($3600 for a child under six) and made it fully refundable. For a family with two kids that meant an increase in income of between $2000 and $4400 a year. For a family making $20,000 that’s close to a 10 percent increase at the low end. For those with two kids under six who were only getting $1400 before (because of incomplete refundability) that’s a whopping 22 percent.

Average wage increases do not tell the whole story. Low wage workers have received higher wage increases than the average. For example, pay in the leisure and hospitality sector rose 13 percent from August 2020 to August of this year. Though no one likes it when prices jump, if wages (or subsidies like the Child Tax Credit) jump more, the typical person is ahead of the game.

[On restaurant wages see:


People receiving social security get a cost-of-living adjustment every year. Come January, Social security checks will automatically ratchet up 5.9 percent. A monthly SS check of $1500 will jump to $1588 -- enough to cover general price increases. (Food prices are definitely increasing but the year over year rate for food consumed at home is under 3 percent.)

What all of this means is people should not panic about this past year’s inflation spike because a significant majority of the people have increased incomes to cover it.

This is where Manchin’s worry about too much spending is misplaced. The people who have suffered the most from the current spike in inflation are those who still are not able to get back to work. Biden’s two bills, the one that just passed and the Build Back Better Bill will increase employment and extend important payments like the Child Tax Credit.

More people will be taking home those paychecks (and by the way, paying payroll taxes into the Social Security and Medicare trust funds!) and all families who qualified for the expanded child tax credit in calendar 2021 will get the same payments directly from the IRS over the course of 2022. But -- that is only if the Build Back Better Bill passes! Without that bill, the refundable child tax credit will revert back to $2000 a year – a cut in pay for those who can least afford it.

The way to protect the real incomes of moderate and low income people from the current surge in prices is to increase government spending which will create jobs and prop up those with low incomes. That requires the passage of the Build Back Better Bill – not government austerity. The complaint about inflation is a red herring. What Rattner and Manchin are arguing for --- more government austerity --- would really damage the economy. It might even abort the recovery. If Democrats are worried that negative economic news will guarantee they lose the House and Senate next year, they should worry about the recovery being stalled not whether inflation is at six percent for the next six months before starting to fall.



New unemployment claims are down seven weeks in a row:

  • Today’s unemployment claims data are another welcome sign of our economy’s strength as Americans get back to work.
  • New claims fell to 268,000, the lowest level since the pandemic began. The four week average fell from 278,500 to 272,750. Unemployment claims are down more than 70% since President Biden took office.
  • Both this week’s claims – and the four week moving average – are at their lowest level in nearly 20 months since the beginning of the pandemic. Importantly, they’re close to the levels we’d expect in a normal health economy.
  • This is progress. The week President Biden took office, almost than 900,000 Americans filed for unemployment. Now, it’s under 270,000.
  • We’ve created more than 5.6 million jobs – more than 620,000 a month on average – and the unemployment rate has fallen to 4.6% two years faster than the CBO projected we would reach that level.

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies

The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.

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