The Second Great Inflation
Here we are, Mr. President, by way of Keynes and Kiev.
Last month, President Biden rejected the argument that his administration’s policies had caused the runaway inflation now plaguing the economy. In general, holding a president accountable for economic setbacks is unfair. Inflation reflects an imbalance between supply and demand—excessively restricting the former or stimulating the latter will inevitably push prices higher—and it has many causes beyond the designs of any given president.
Consider Jimmy Carter, the contemporary standard for failed presidencies. Carter presided over an America ravaged by the First Great Inflation, but the domestic sources of that inflation preceded his term and foreign crises exceeded his abilities. Unfortunately for America, Biden’s failure is unique: He created the conditions for 8.5 percent inflation with a single policy.
One month after taking office, Biden outlined his foreign-policy agenda. Notably, Biden asserted that the dividing line between foreign and domestic policy had faded. Accordingly, Biden vowed to undertake a “foreign policy for the middle class” in which a domestic economic revival would provide the foundation for success abroad. In this two-part formulation were the seeds of the current crisis.
To achieve this revival, Biden embraced the 80-year-old tenets of New Deal liberal Keynesianism and proposed an economic-stimulus package for nearly $6 trillion in new government spending. The package comprised three major components: pandemic relief, infrastructure spending, and family-oriented programs.
This was ambitious but unnecessary, because the Trump administration had already passed relief legislation the year before. The 2020 CARES Act totaled $2.2 trillion, nearly 10 percent of the nation’s gross domestic product and the largest such stimulus package in American history. And it succeeded—the economy grew by an estimated 33 percent the next quarter.
Trump opposed additional spending later in the year and only yielded after faced with the prospect of his veto being overridden. In December 2020, Congress injected an additional $900 billion into the recovering economy.
By the time Biden announced his plan, several economists, including prominent ex-officials in preceding Democratic administrations, were strongly warning that implementing his program would have inflationary consequences. The administration ignored them, and, in March 2021, Biden secured passage of the package’s first component, the $1.9 trillion American Rescue Plan.
The administration characterized the plan as relief but, in the middle of back-to-back quarters marked by historic growth rates, the additional spending only triggered the inflation latent in the economy.
In April, Biden introduced the second and third components of his package for an additional total of $4.0 trillion. The very next month, the inflation rate rose above 5 percent.
Amid subsequent negotiations with Congress, the administration received widespread condemnation when it characterized the preceding six months of above 5 percent inflation as “transitory”. Biden eventually compromised on his infrastructure plan and abandoned his Families Act.
By the end of 2021, Biden’s Keynesian gambit only ignited demand and ultimately generated 7 percent inflation. The climb to 8.5 percent began in Kiev.
U.S.-Russian relations were fraught right from the start of Biden’s presidency. President Trump’s interest in rapprochement with Russia collapsed on revelations of Russian disinformation activities during the 2016 presidential election and (false) accusations of collusion with Putin to win the election.
Having served as vice president, Biden readily understood that engaging with distasteful leaders was inherent to foreign policy. Nonetheless, Biden harbored considerable personal malice for Putin, and by the time he assumed the presidency, he was depicting Putin as a threat not only to the West but democracy itself.
In his first phone call with Putin, Biden warned him “the United States will act firmly in defense of its national interests in response to actions by Russia that harm us or our allies.” Biden’s definition of America’s national interests, however, included Ukraine.
During the interlude of the Trump presidency, the matter of Ukraine’s alignment with the West or Russia had been muted. However, Biden’s election marked the resumption of American foreign policy focused on NATO expansion. A clash with Russia over Ukraine’s future was inevitable.
Biden had been a longtime supporter of NATO’s expansion eastward, as well as a stalwart advocate for Ukraine during his tenure as vice president. Ukrainian President Zelensky, who had rarely advocated for NATO membership during his first two years in office, sensed an opportunity after Biden’s inauguration and immediately resurrected the issue.
The West eagerly responded. In June, NATO issued a communique reiterating its support for Ukraine’s membership. Biden personally confirmed his support when Zelensky visited the White House later in the year. In November, Secretary of State Antony Blinken and Ukrainian foreign minister Dmytro Kuleba signed a “charter of strategic partnership,” which, among other things, explicitly stated that America supported Ukraine’s membership in NATO.
Putin warned, repeatedly, that expansion into Russia’s near abroad would be considered aggressive. Expansion proponents countered Russian concerns were exaggerated because NATO was a defensive alliance. The claim, however, was belied by the West’s conduct for the past 30 years.
As outlined in recent scholarship, successive presidents repeatedly brushed aside post-communist Russia’s legitimate security interests and failed to consider the consequences of aggressive expansion. More pointedly, America’s conduct was inherently predatory. Year after year, Russian diplomatic protests were disregarded and assurances to its representatives were abandoned.
NATO expansion took a critical turn in 2004 when it accepted Estonia, Latvia, and Lithuania as members. The three Baltic states joined with four other nations, but they represented the first former Soviet territories to become members of the alliance.
Unlike the hapless Yeltsin, Putin was less accommodating. When NATO announced its intent to invite Georgia to join, Russia responded by invading. When pro-Western dissidents overthrew the pro-Russian government in Ukraine, Putin responded by sending irregular forces into the eastern part of the country and annexing Crimea.
With the return of Ukraine’s membership to the fore, Putin remained adamant that NATO membership for Ukraine was unacceptable. Through the winter of 2021, Russia positioned thousands of troops on its border with Ukraine and transmitted multiple proposals to settle the matter. Biden responded by rejecting Russian proposals and augmenting American forces on NATO’s eastern flank.
On February 24, Russia launched its invasion of Ukraine. Biden’s pledge to “confront Russian aggression” one year earlier had not deterred Putin. Western leaders subsequently made good on their threat to impose sanctions, but they failed to prepare for the economic consequences, even after being presented with their possibility of military action for six months.
The war between two of the world’s “breadbaskets” has decimated the global supply of food and fertilizer, and has pushed world prices 34 percent higher than the same time last year. Speaking to the Global Crisis Response Group on June 8th, UN Secretary-General António Guterres stated, “This year’s food crisis is about lack of access. Next year’s could be about lack of food.”
On the energy front, termination of Russian oil and natural gas imports has also propelled world prices substantially higher. In the United States, gas prices have soared, rising over 100 percent since Biden took office.
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The United States was the world’s largest energy exporter as recently as 2021, but upon taking office, Biden cancelled the long-delayed Keystone XL pipeline and paused new oil and gas leases on public lands. Biden’s responses to war-induced shortages have been feckless, ranging from releasing minuscule amounts from the Strategic Petroleum Reserve, accusing energy producers of price gouging, calling for a gas-tax holiday, cravenly reversing American diplomacy with Saudi Arabia and Venezuela, and, predictably, blaming Russia.
In the past month, the inflation rate hit another historic high, the Federal Reserve raised interest rates by the largest increase in nearly 30 years, consumer sentiment and small-business expectations registered at their lowest level in fifty years, and stock-market declines have convinced many the economy will fall or has fallen into recession. Biden’s Department of Energy just predicted electricity prices would increase significantly this summer.
One month after Biden outlined his foreign policy for the middle class, Secretary of State Blinken said the president and the Administration would hold itself “accountable to a single, overarching measure of success: Are we delivering results for you?” Amid the Second Great Inflation, Americans already have the answer.