Something extraordinary is breaking out at the moment: a debate about inflation. The trigger is the $ 1.9 trillion stimulus bill that President Biden and the Capitol Hill Democrats intend to push through in a party line vote.
The sum has turned out so that even seasoned wasters get nervous. “There is a possibility that macroeconomic stimulus, closer to World War II levels than normal recession levels, could create inflationary pressures unlike any we have seen in generations,” warned Larry Summers last week.
Never be afraid. “I can tell you that we have the tools to deal with this risk if it occurs,” Treasury Secretary Janet Yellen assured the world on Sunday. Federal Reserve Chairman Jerome Powell is likely to agree. He has been campaigning for a fiscal breakout for months, while the Fed expects the risks to financial stability – a pillar of Mr Summers’ inflation concerns – to be only “moderate”.
Don’t underestimate how stupid this debate is. Even Mr. Summers’ toned down inflation warning is based on his precise calculations of things that are not known.
With the assistance of the Congressional Budget Office, it begins with a guess about the “potential production” the US economy could produce in a fantasy world without a global pandemic, and moves on to a guess about the actual level of production America might produce this time in the next Year and then calculates a “output gap” that is the level of stimulus the economy “needs” to cover the difference. That the democratic incentive far exceeds this estimate of the output gap makes Mr Summers rattle on inflation.