economy

How the Biden administration misjudged inflation

How the Biden administration misjudged inflation

How the Biden Administration Misjudged Inflation UPDATED DEC 12, 2021 06:00 PM EST Cecilia Rouse, chair of the White House Council of Economic Advisers, says the rate should fall to about 3% by the end of 2022 Economic growth has roared back from its lockdown-induced slump in 2020, powered by massive fiscal and monetary stimulus. But that has come with new challenges, including a tight labor market, scrambled supply chains and concerns about inflation. Cecilia Rouse, chair of the White House Council of Economic Advisers, met with Greg Ip, The Wall Street Journal’s chief economics commentator, at the WSJ CEO Council Summit to discuss whether the US economy is on the right track. Edited excerpts follow. MR. IP: Your team projected in the spring budget that unemployment now would be 5.5% and inflation would be 2.1%. Well, the unemployment rate is a full point below that … MS. ROUSE: Guess we overachieved there. MR. IP: But the inflation rate is four points above that. What happened? And where do we go from here? MS. ROUSE: The American Rescue Plan was designed to distribute the vaccine effectively and quickly and provide support to households, workers, families. And there was support for state and local governments. We didn’t know how long the pandemic would really last. So the plan was a robust effort to support the economy. No doubt, the very rapid decline in the unemployment rate is partially due to the fact that we sustained aggregate demand. On the inflation side, we anticipated that the market would be more open. I would say we were largely on the right track through June, July. Maybe inflation was a little higher than we expected. As the inflation rate started to tick up, it was very targeted to pandemic-related sectors—the auto sector, airlines. But it has become more broad-based. And that is largely, at least from our diagnosis, due to the elevated demand. We just didn’t fully appreciate that the supply chain wouldn’t be able to process the elevated demand for durable goods. We have demand for durable goods above pre-pandemic levels, but we just can’t get them through our ports. MR. IP: What can the president do to fix either of those things? MS. ROUSE: The president has had a supply-chain task force since he took office, and one of the things that this task force—led by the secretary of commerce, and there is a group headed up in the White House—has understood is there’s a lack of visibility into supply chains. There’s an effort to increase the data availability so the market can work better. We have some of the least efficient ports in the world. Port managers aren’t talking to the truckers. The truckers are sitting idle for too long. So he has been able to improve efficiency. And we’ve seen some of those wait times come down, and goods are moving much more efficiently through our ports. MR. IP: It has been the administration’s viewpoint that once these pandemic-induced pressures on the economy subside, inflation will go back to a little over 2%, near the Federal Reserve’s target. Is that still your view? What do you think inflation will be a year from now? MS. ROUSE: We do believe inflation will come down. I expect it to be about half or so of—where are we right now. MR. IP: Inflation is around 5% or 6%. MS. ROUSE: We expect it to ease over the coming year largely due to not only working through the supply-chain bottlenecks, but we didn’t get to what the president can be doing on the labor side. Some of the legislation—the Build Back Better framework, providing assistance for child care, universal pre-K, paid leave—are important going forward. He’s looking at the trucking industry—are there ways we can stand up apprenticeships to get people trained to be qualified truckers more quickly? Can we ease the backlog on commercial driving licenses, which have developed over the pandemic? We’re looking at various ways to help get people back to work. We need to be making investments in our people, so that we can increase labor supply. MR. IP: The labor-force participation rate is still roughly two points below where we were before the pandemic. Wages are growing very rapidly in ways that we usually don’t associate with a labor market that still has four or five million fewer people employed than a year ago. How will the labor market in coming years be fundamentally different from the pre-pandemic labor market? MS. ROUSE: It’s a little early to judge how fundamental the change is. But we are not going to get back to the size of the labor force we had before the pandemic. Some of that decline is because of early retirement. We’re at pretty much the peak of the baby boom starting retirement, so we knew that we were facing headwinds even coming into the pandemic in terms of the size of our labor force. We know that there have been increases in house values. The stock market is doing very well, so people’s wealth has increased. And this has been a traumatic almost two years where people have said, “It’s not worth it for me to go out at this moment and risk my health for a job I may not have loved. And I’m going to take early retirement. While people sometimes retire from one job and take another, what we see are people not coming back. So we don’t necessarily expect the labor force to get back to where it was. MR. IP: A lot of unvaccinated people say they will quit rather than follow an employer’s requirement that they get vaccinated. Many business leaders are concerned that such a requirement will make labor-shortage problems even more acute. MS. ROUSE: It’s a conundrum. What we’ve seen though is that the employers that have required vaccines on their own havent seen a mass exodus of employees. To get through this pandemic, our bodies are going to have to be able to address this virus. And vaccination is one of the fastest and best ways to get to the other side. It’s hard to have one’s cake and eat it too in saying, “We don’t want people to be vaccinated, but we also are impatient about getting to the other side of the pandemic. MR. IP: If hospitals and health systems are being overwhelmed, can you see a scenario where we will go back to lockdowns or business restrictions? MS. ROUSE: I believe that we have learned in the past two years how to coexist with this virus. And I think that will continue. So I don’t anticipate that we have to go back into the severe lockdown. But we are at the whim of this virus. And so it will just depend if we end up with one that is quite severe and quite transmissible. MR. IP: Senate Minority Leader Mitch McConnell has said the inflation we’re seeing is the fault of government spending. Is Build Back Better going to make our inflation problem worse? MS. ROUSE: We don’t anticipate Build Back Better will contribute to inflationary pressure. Build Back Better and the Infrastructure Law aren’t stimulus. This isn’t the same thing as the American Rescue Plan, or the Cares Act. This isn’t designed to get us out of recession. They are designed to be long-term investments that are long overdue in this country. Early childhood education—we know it pays for itself over time. We know that labor-force participation rates of women in this country lag behind those of women in other countries largely because we don’t provide adequate child care and don’t help families with that very expensive cost. With our aging population, we need to be taking care of our elders, and home care is also a very big challenge. We need to make investments in higher education—human capital, which is a productive investment. These are all investments in the economic capacity of our economy, which only ease inflationary pressure, which comes about when you have too much demand given the supply. They also spend out over time. MR. IP: We are facing a bit of a human-capital crisis as a consequence of the school closures last year. There are millions of children who have missed out on effectively a year of in-person instruction. What do you believe are the short- and long-term consequences of that? Was it a mistake to do what we did with school closures? How do we ameliorate it? MS. ROUSE: Was it a mistake to close schools? We were in a defensive crouch. But we did what we could. I think we can make up some of this ground. More school, more time on task generates more improvement. So, again, like the American Rescue Plan provided resources for schools, for state and local government, they could be providing after-school tutoring or after-school sessions. Pushing into the summers to recover some of that time would be one strategy. We’re going to have to educate smarter and really focus on those interventions that we believe make a difference for children. We know that children do better in smaller class sizes. That does require more teachers. This may require that we compensate teachers more. So we will need to pay to recoup the investment that we lost. Download.

economy 2021-12-13 Livemint