The Daily - Did Democrats Make Inflation Worse?

Episode Date: February 1, 2022

Inflation in the United States has been getting worse. In December, prices were up 7 percent from the previous year — the fastest rise in 40 years. Americans feel terrible about the economy, imperiling the Democratic Party’s chances of holding on to power in Washington in this year’s midterm elections.While disruption caused by the pandemic is a key cause of higher prices — a situation that predates the Biden administration — a question remains: How much have the Democrats’ own policies contributed to the problem?Guest: Ben Casselman, an economic and business reporter for The New York Times.Want more from The Daily? For one big idea on the news each week from our team, subscribe to our newsletter. Background reading: Prices in the United States are rising rapidly, wages are growing and consumers are glum as a fraught economic moment poses big challenges for policymakers.President Biden is suffering in the polls as high inflation saps confidence in the economy, even as growth comes in strong.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From The New York Times, I'm Michael Barbaro. This is The Daily. Today, spiraling inflation is now imperiling the Democratic Party's chances to hold onto power in Washington and raising a question. How much have the party's own policies contributed to the problem? I asked that question to Ben Castleman. It's Tuesday, February 1st. Hi, Ben. Hi, Michael. You know, the last time we spoke, we were like in the office.

It felt like we were back to normal. Yep. And now I'm once again seeing your shirts hanging in the background. J.Crew. It's beautiful. We are not in studio. We are not together because things have changed. Things have changed.

Well, Ben, when we last had that conversation in person, we talked a lot about the I word, inflation. It was bad then. And I wonder what's happened since. Still bad? Badder? Less bad? It's worse.

You know, I think when we had that conversation, we talked a lot about how the economy was pretty good, but inflation was bad and people weren't feeling great. And all of that is still true, but it's even more so. Inflation in December was, prices were up 7% from a year ago. That's the worst in 40 years. People still feel terrible about the economy. If anything, they may feel worse about it. And policymakers at the Fed and in the White House are clearly at this point paying very close attention and I might even say are getting worried about inflation. The Federal Reserve just last week came out and said that they are in all likelihood going to start raising interest rates in March to try to combat inflation and that more generally they're

going to get really aggressive about trying to hold down price increases as they've continued to spiral. And that same week. Will you take questions on inflation then? We got a sense of how this is kind of getting under the president's skin when President Biden was asked on his way out of an event at the White House. Thank you all. Do you think inflation is a political liability ahead of the midterms? Whether inflation was going to be a liability in the midterms. And he was caught on a hot mic with a less than generous response,

I think, to the Fox host who asked the question. That's a great asset. More inflation. You're a stupid son of a bitch. More inflation. You're a stupid son of a bitch. And watching that scene play out at the White House, Ben, it feels like on some level, the answer to that reporter's question is pretty obvious, right? Nobody likes higher prices.

Of course, this is a political liability for the president and for Democrats in Congress. And the question would seem to be, should it be a liability? How much are Biden and Democrats responsible for higher prices for inflation? So I think that's a key question, and the answer is really complicated. The first thing to say here is that clearly a big part of what is happening with inflation is just the pandemic itself. A lot of what we are seeing in terms of higher prices is being driven by the pandemic and all of the disruptions it has caused. And that, of course, predates President Biden and is clearly, to some measure, outside of his control. So then I guess the question is sort of to what extent have Biden's policies made inflation worse?

And to understand that, you've really got to go back to the beginning of the Biden administration or actually even before the beginning of the Biden administration and the debate over what became the American Rescue Plan. So remind me about the American Rescue Plan and the context of the American Rescue Plan. So if you think back to December of 2020, beginning of January of 2021,

Biden has won. He's not yet taken office. We're in what is in some ways the worst moment of the pandemic to that point in terms of cases and deaths. The economy had already had this huge aid package back in the spring, but that had really begun to fade by that point. And Congress in December passes an aid package, a $900 billion aid package that many Democrats felt was too small, given how serious the need was at that time. As I've said all along, this bill is just the first step, a down payment in addressing the crisis, the crises, more than one that we're in.

There's a lot more work to do. And Biden comes into office saying, I am going to pass something much bigger, much more aggressive that is going to really help carry the economy through. Early next year, I'm going to put forward to the Congress my plans for what comes next. We'll need more help to fully distribute the vaccine. A third stimulus. That's what he's talking about. A third stimulus. And in particular, one crucial piece of this is that we're going to send another round of checks to basically every American household.

And you need to remember, right, this is the beginning of January. Control of the Senate is still up in the air, right? We've got these two crucial runoff races in Georgia. One state can chart the course, not just for the next four years, but for the next generation. By electing John and a reverend, you can make an immediate difference in your own lives. And this idea for a third stimulus, and in particular for another round of checks. We'll put an end to the block in Washington, that $2,000 stimulus check. That money that will go out the door immediately, tell people who are in real trouble.

Becomes a really crucial piece of that Georgia Senate race. We will be able to pass $2,000 stimulus checks for the people next week when we win these races in Georgia and get economic relief directly into the bank accounts of the American people who are suffering right now. The candidates, including John Ossoff, are going out across the state saying, if you want another round of checks, if you want more help, then elect us Democrats to the Senate. Give us control of the Senate. We will pass $2,000 stimulus checks immediately for the American people. I spoke with the president-elect about that personally yesterday. And it works. Democrats win both those races. about that personally yesterday. And it works.

Democrats win both those races. CBS News projects that both Democrats have won those two seats. Really extraordinary development given to... And so Biden is sworn in on January 20th with control of the Senate. And about the first thing he does is set out to try to keep that promise, to pass a major aid package,

including checks for American households. And beyond the checks, Ben, what ends up in this proposal? Yeah, I mean, it's a good question because we remember the checks, right? We tend to remember when we get, you know, a few thousand dollars deposited into our bank accounts. But it was not just the checks. There were really three goals to this bill. There was trying to end the pandemic as quickly as possible. So it included a lot of money for the vaccine rollout and for public health assistance. They were trying to help the people who were still really suffering economically. So they extend the unemployment benefits, for example. And then there was sort of trying to set up the economy for success as the pandemic ended. And that's really where the checks play a big role. It was sort of trying to make sure that we could, as we

emerged from the pandemic, that people had money in the bank that they could go out and spend, and that could sort of propel the economy forward coming out of the pandemic. And Ben, who was going to get the checks and how much were they going to get? Yeah, so the checks ended up being this round was $1,400 per person to just about anybody making a middle class salary or less. to just about anybody making a middle-class salary or less. Mm-hmm. And as I remember, even though Republicans had passed two stimulus bills during the Trump administration,

they do not sign on to this third stimulus. What were their objections? Madam Speaker, there's an old country saying you can put all the perfume and lipstick you want on a pig, and it's still pork, and it still stinks. and lipstick you want on a pig, and it's still pork, and it still stinks. They basically didn't think that the economy still needed that kind of help. The CBO predicts our economy will grow by 3.7 percent this year without any further congressional action. This is merely socialism and sheep's clothing. Redistribution of wealth through cash payouts to many who have had no financial impact whatsoever from COVID. By this point, the economy had begun to emerge from the pandemic a little bit, and they were saying, you know, we've already given a ton of help to people. They don't need more of it.

This bill pays people more to be on unemployment than to go to work. They worried that unemployment benefits were going to keep people out of work. They worried that the child tax credit was going to create a dependency on the government. And they worried, some of them, that this kind of spending was going to cause inflation. Inflation is starting to pick up in this country. Gas prices are up. Food prices are up. Who's going to get hurt? The poorest families are going to get hurt. This is wrong. And it won't go through that in a kind of econ 101 manner. Why would a stimulus, especially a stimulus that puts money directly into the pockets of consumers, lead to inflation to higher

prices? And why would that have therefore been a logical thing for Republicans to fear? So in a classic econ 101 model, if you just pour a ton of money into the economy, it doesn't lead to more production. It doesn't even really make people richer in any real way. It just makes them spend more, which leads to higher prices. If you think about it this way, if there's a factory that's already charging along, making everything it can, and you give people a ton more money, then the factory can't make any more stuff. So all that happens is they raise their prices and everybody gets the same stuff

they would have gotten otherwise. They just paid more for it. And that's inflation. And that was the argument that Republicans were making. And, you know, a lot of people who were worried about inflation were making at that point. And what did Biden and what did Democrats have to say in response

to that worry as they are getting together and pushing this third stimulus through? Did they address it? There was a little bit of a collective eye roll, a sort of here we go again. And what I mean by that is we have been hearing these same complaints about how government spending and stimulus was going to cause inflation for years and years and years. We heard it after the stimulus efforts in the last recession. We heard it when the Fed was trying to stimulate growth in the years after the Great Recession. There were people, including Republicans, including economists, saying, oh my goodness, if you keep doing all this, you keep spending all this, it's going to create inflation. And it never happened. If anything, the problem before the

pandemic was that inflation was too low. And, you know, I think what we learned and what many economists and policymakers sort of took from the experience after the last recession is that the economy is dynamic, that it is stronger than we give it credit for. And so that old econ 101 model of you pour in money and the widget maker raises prices, well, actually, the widget maker hires more workers and makes more widgets.

Maybe he innovates a new way of making widgets and makes them more efficiently. And so when you give people money in this reality, instead of just getting higher prices, you actually get more widgets and we're richer as a result. we're richer as a result. And I think that's the world that we were living in, or at least that the Biden administration thought we were living in when it passes this plan in the spring of 2021. Got it. So Democrats can collectively shrug off this fear of inflation because inflation hasn't been the result of government spending in the past. And they can basically tell Republicans to buzz off. Yeah, that's right. It passes in March. $1.9 trillion starts to flow into the economy. And at first, it seems to be doing its job, more or less, right?

The vaccines start spreading. Businesses start reopening. People start going out. They start spending money again. And prices start rising. None of that is necessarily very concerning to anybody. And I think most economists at that point thought this was going to be kind of a blip as things reopened, and then we would settle back into something that looked a little they didn't. Prices kept going up and they kept going up

and by the end of the year we have the worst inflation in 40 years. We'll be right back. So Ben, that brings us to today and to this inflationary moment that we are still very much living in. and to this inflationary moment that we are still very much living in. And the question is the exact role that the third stimulus played in bringing us to this inflationary moment. So walk us through that. So Michael, I told you at the beginning that it was complicated.

You did? And I think that what the Biden administration didn't realize when it passed that stimulus back in March was all of the ways in which the pandemic was going to still be disrupting our lives nearly a year later. And the ways in which that made it harder for the economy to absorb that $1.9 trillion that was pouring into it. And as a result, how those two things would come together to cause inflation. Okay, well, let's start with the things that the Biden administration didn't realize were going to be making the economy not quite work the right way, and how those give us inflation.

So if you think back to March, as the vaccines were starting to roll out, we kind of thought that we would be on a glide path back towards some kind of normality. And I think for a little while, it maybe felt like that was happening. But then we got Delta and we got Omicron. We got workers who weren't comfortable returning to work, child care that was still disrupted that made it harder for people to return to work, global supply chain problems, right? Because, of course, the pandemic is raging not just here but around the world, and that led to factory shutdowns in all sorts of parts of the world, to shipping delays. And all of these things sort of contribute to making it hard to make stuff. Let's talk about cars. Ordinarily, when people want to buy cars,

car factories will pump out more cars. Well, that's pretty tough to do if you can't get workers. It's pretty tough to do if you can't get the parts that you need. And we saw this around the world where crucial parts for cars weren't available for a complex stew of reasons that we probably can't even begin to get into here. But for example, we had plants in Kansas City that were shut down for months because they couldn't get microchips. And so all of the sort of normal rules that we had come to expect where, okay, when there's lots of demand, we'll just make more stuff, those didn't apply all of a sudden. Right.

And if there aren't enough microchips to make enough cars, then the cars that exist are going to be more and more expensive. That's the very nature of inflation, as you explained earlier. That's exactly right. Okay, so how does the third stimulus factor into this? Well, the third stimulus factored into it because all of a sudden people had a lot more money to spend on cars. And in fact, we can see that really directly in the economic data, that when those checks hit people's bank accounts, people started spending, including on cars. You know, remember, at that moment in time,

people had already received a couple of rounds of stimulus. Americans, in the aggregate, actually had managed to save quite a bit of money. Now, that's not true of every individual by any means. But in the aggregate, Americans had savings. They weren't necessarily in deep financial trouble. And so you get a windfall like that and you say, hey, this is a great time to go and buy a car or a couch or a new dishwasher, that thing that I had been kind of putting off.

And so people went and spent on exactly the set of things that are hard to produce in a pandemic. So at just the moment when Americans have this extra money to spend from the stimulus, the economy has been seized up by supply chain issues, by worker shortage issues, and can't produce the things that people want to spend their money on fast enough. And so the prices of all those things are higher than anybody wants them to be. And the stimulus has played a role in that. More demand, limited supply leads to higher prices. That rule from Econ 101 still applies. So what you're describing is how the third stimulus really exacerbates inflation brought on by the pandemic. It doesn't cause it. we should be clear about that.

It amplifies it. It makes it worse. Yeah, look, I think that there is pretty widespread agreement that the increased demand that came from giving people those checks contributed to inflation. It worsened the problems being caused by those supply constraints. Now, I think there's quite a bit of disagreement about how much of that you should assign to each piece of this puzzle. Prices rose 7% in December from a year ago. What would they have been without that stimulus plan? Would they have been up 4%, 5%, 6%? You're going to get disagreement among economists on that question. I think you would get pretty overwhelming agreement that inflation would have increased even without the American Rescue Plan. And I think you would get pretty widespread agreement that prices would not have been all the

way up at that 7% increase without the American Rescue Plan. But where in the middle? There's going to be a lot of disagreement on that question. So clearly the Biden administration bears some level of responsibility for the inflation we're now living with. Yes. But the question really is whether it was worth it. Whether the damage being done by inflation is worth the benefits that all of that spending, all of that stimulus brought to households and the economy. And how do you answer that? Well, so the Biden administration has a lot

that it can point to in its favor. The unemployment rate now is below 4%. If you polled economists back in the early part of last year, they would have said it would take years to get to that point. And it got there quickly in part because all this money poured into the economy and encouraged employers to hire and got people back to work. We saw child poverty fall last year. We saw incomes rise and savings rise. We saw economic growth accelerate almost back to the path that had been on before the pandemic. And so there are a lot of ways in which the economy fundamentally is stronger today than it would have been without all of that help. So if you're a Democrat, this third stimulus is the definition, it would seem,

of a mixed blessing. It may have helped Democrats win control of the Senate. It may have helped Democrats put the economy on a fundamentally strong path. But it now seems to be contributing to a problem politically that could cost Democrats control of Congress in the midterms this fall. That's right. Ben, let me ask you a completely unfair and provocative question. Do you think that Democrats will come to regret the third stimulus, or do you think they go to bed reasonably comfortable that this was the right call? I'm going to give you the on-the-one-hand, on-the-other-hand answer that I always give you, Michael. Okay, proceed. Which is that time is going to tell. Okay, proceed. Which is that time is going to tell.

I think the odds that this inflation problem gets resolved in time for the midterms are very low. I'm not a political pundit, but it looks pretty clear that Americans are not happy with where they are in the economy right now, and that seems unlikely to change quickly. But over the slightly longer term, I think it's harder to say. You know, you could imagine a scenario where the pandemic really does start to recede and that allows workers to come back. It allows daycares to return to something more normal. It allows factories to ramp up their production again

and supply chain bottlenecks to ease. And so inflation starts to recede. And now when people have money to spend, it really does result in more cars getting made instead of just prices going up. And maybe by the time we get to the presidential election, we're able to look back and have this really seem like a strong economy.

And the inflation episode feels like a painful blip. But it is also possible that inflation continues, that it continues to eat into wages, that people continue to feel like they're falling further behind. And then that's not only a problem for Biden's re-election chances, it's a real problem for the economy and for the Americans who live in it. Well, Ben, thank you very much.

Thanks for having me. We'll be right back. Here's what else you need to know today. On Monday, the British government released a highly anticipated report into a series of parties held by Prime Minister Boris Johnson and his staff at 10 Downing Street that appeared to violate the country's health rules during the pandemic. The report found failures of leadership and judgment by Johnson's government and a culture of excessive workplace drinking.

But it did not directly accuse the Prime Minister himself of wrongdoing. Firstly, I want to say sorry. And I'm sorry for the things we simply didn't get right and also sorry for the way that this matter has been handled. In a speech to Parliament soon after, Johnson apologized to the British people. But Mr. Speaker, it isn't enough to say sorry. This is a moment when we must look at ourselves in the mirror and we must learn.

And the U.S. government has granted full approval to Moderna's COVID vaccine, which has, until now, been administered under emergency use authorization. The Moderna vaccine becomes the second to earn such approval, which involves a detailed scientific review. The COVID vaccine from Pfizer-BioNTech was fully approved in August. Today's episode was produced by Rob Zipko and Luke Vanderploeg,

with help from Michael Simon-Johnson. It was edited by Lisa Chowko and Luke Vanderplug, with help from Michael Simon Johnson. It was edited by Lisa Chow and John Ketchum, and was engineered by Dan Powell, and contains original music from Marion Lozano and Dan Powell. Our theme music is by Jim Grunberg and Ben Landsberg of Wonderly. That's it for The Daily. I'm Michael Rubarro. See you tomorrow.