Last night, President Joe Biden tried to make the case for an extra $4.1 trillion in new spending on top of his $1.9 American Rescue Plan.
Today, the Bureau of Economic Analysis delivered what might constitute a crushing blow to such ambitions, even though it is clearly good news for the rest of us.
On an annualized basis, the economy grew by 6.4% in the first quarter of the year — basically, for the three-month period before Biden's first round of ARP spending went into effect. This level of growth, on par with what most experts estimated, was driven by consumer confidence and business reboots as onerous government lockdown measures fade away. Driven by a marked increase in spending on goods, personal consumption expenditures soared.
But then, so did price indices.
A favored measure of inflation by the Federal Reserve, the personal consumption expenditure price index rose by 3.5% — more than twice the 1.5% increase of the fourth quarter of last year. Fed Chairman Jerome Powell only just committed to keeping interest rates near zero for the rest of the year, even if inflation does occur. In this context, the economic case for Biden's massive spending ambitions may be unsustainable.
Perhaps you believe the lie that the country's roads and bridges are crumbling disasters. (They aren't.) Maybe you honestly think that child care counts as infrastructure. (It doesn't.) And possibly you've bought into the idea that $4 trillion, not even a full trillion of which goes into real infrastructure, is what's needed to solve these problems.
None of that changes the fact that the economy is evidently returning to its pre-pandemic strength, not due to massive government spending but simply because of increased vaccination, and that is letting government get out of the way of the private sector.
The looming threat of inflation, finally, after such an extended period of dovish monetary policy, should probably be taken seriously for a change. Six trillion dollars in new spending would be a bad idea at almost any time, and especially after the binge that Uncle Sam has been on in the last 15 months. But tack on a suddenly realistic threat of inflation, and it begins to look like lunacy.
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