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Reagan & Volcker Killed Inflation. Will Biden & Powell Bring It Back From the Dead?

Summary:
President Joseph Robinette Biden Jr. (JRB) aspires to be as transformative a president as was FDR in expanding the scope and scale of the US social welfare state. Biden is also the anti-Reagan president. He loves Big Government as much as President Ronald Reagan hated it. Furthermore, he has as much faith in Big Unions as Reagan distrusted them. The Reagan Revolution didn’t last very long. President Ronald Reagan was a proponent of free-market capitalism. He was against big government. He championed the constitutional system of federalism and the republican system of checks and balances. Yet here we are three decades later with lots more crony capitalism and with the federal government bigger and more powerful than ever. Conservative presidents have had very little lasting impact on the

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President Joseph Robinette Biden Jr. (JRB) aspires to be as transformative a president as was FDR in expanding the scope and scale of the US social welfare state. Biden is also the anti-Reagan president. He loves Big Government as much as President Ronald Reagan hated it. Furthermore, he has as much faith in Big Unions as Reagan distrusted them.

The Reagan Revolution didn’t last very long. President Ronald Reagan was a proponent of free-market capitalism. He was against big government. He championed the constitutional system of federalism and the republican system of checks and balances. Yet here we are three decades later with lots more crony capitalism and with the federal government bigger and more powerful than ever.

Conservative presidents have had very little lasting impact on the course of our nation. Progressive ones have made much more progress at leaving their marks. The legacies of Theodore Roosevelt, Woodrow Wilson, Franklin Delano Roosevelt, Lyndon Baines Johnson, Bill Clinton, and Barack Obama have radically changed our country. They all expanded the social welfare state to varying degrees. Now President Joe Biden intends to build on their legacies.

To some extent, the Reagan legacy was briefly revived by President Donald Trump. But now under Biden, the progressive agenda is back on the fast track. What is different this time is that Biden, unlike his progressive predecessors, seems to have no concerns about the deficits that will result from his mammoth spending programs. Sure, he is pushing to raise tax revenues to cover some of the costs of his spending plans. But revenues are very unlikely to come close to covering Biden’s ambitious expansion of the social welfare state.

Furthermore, Biden and his economic advisers seem to have no concerns about the inflationary consequences of their policies. On the contrary, they are pushing for higher wages and more power for labor unions. Their regulatory policies, especially the ones aimed at climate change, are going to add lots to the cost of doing business. Their plan to raise the corporate tax rate will do the same. Yet just last week, Treasury Secretary Janet Yellen said, “I don’t think there’s going to be an inflationary problem, but if there is the Fed can be counted on to address it.”

Reagan may not have been as transformative as other presidents, but he helped to end the Great Inflation of the 1970s by supporting Fed Chair Paul Volcker's tough monetary policies. He also accelerated the demise of the labor union movement in the private sector when on August 5, 1981 he fired more than 11,000 air traffic controllers who had ignored his order to return to work after their union, the Professional Air Traffic Controllers Organization (PATCO), had organized an illegal strike. That marked the end of the wage-price spiral of the 1970s, as many private-sector business executives, following in Reagan’s path, successfully pushed back against their labor unions.

Biden loves labor unions and intends to do whatever he can to bring them back in the private sector. He is also pushing to raise wages. Consider the following:

(1) Raising wages at federal contractors. On April 27, Biden signed an executive order that requires federal contractors to pay a $15-an-hour minimum wage. Currently, the minimum wage for federal workers is $10.95 per hour, and the tipped minimum wage is $7.65 per hour. According to The White House Fact Sheet, starting on January 30, 2022, all government agencies will need to incorporate a $15 minimum wage requirement into new contract solicitations, and by March 30, 2022 all agencies will need to implement the minimum wage into new contracts. Additionally, government agencies will need to implement the higher wage into existing contracts when contracts are extended each year.

(2) Promoting unions. On April 26, Biden signed an executive order that will create a task force to promote labor organizing at a time when just over 6% of US private-sector workers belongs to unions (Fig. 1). The White House task force will be headed by Vice President Kamala Harris with Labor Secretary Marty Walsh serving as vice chair. The order is in the tradition of the National Labor Relations Act, which was passed in 1935 under FDR to encourage worker organizing.

(3) Powell's dovish Fed. Meanwhile, last August, the Fed reworded its dual-mandate statement to prioritize “broad based and inclusive maximum full employment” ahead of maintaining price stability. It is now aiming to overshoot inflation above the official 2% target for a while to make up for undershooting it for so many years. Fed Chair Jerome Powell is the anti-Volcker, doing whatever it takes to bring back (some) inflation.

What about a repeat of the Great Inflation of the 1970s as a result of the current administration's policies? It could happen. However, that decade was uniquely inflation prone. Nixon devalued the dollar on August 15, 1971. The resulting surge in commodity prices was exacerbated by a food price shock (1972-73) followed by two oil price shocks (1973 and 1979). During the 1970s, strong labor unions in the private sector succeeded in quickly boosting wages through cost-of-living clauses in their contracts. Productivity growth collapsed during the decade. The result was an inflationary wage-price spiral [1].

This time may not be different. The dollar is down 12.3% since it peaked on March 18, 2020. Food, energy, and industrial commodity prices are soaring. Wages inflation may be starting to pick up. Labor unions in the private sector may still be weak, but the federal government under Biden is clearly on their side.

Does all this mean that a comeback for inflation is inevitable? Or are there offsetting reasons why this might not happen? I am on the lookout for—but don’t expect—an inflationary wage-price spiral. I do expect to see wages rising more rapidly in coming months given all of the above. The main reason is that I believe that productivity growth is set to move higher during the Roaring 2020s as it did during the Roaring 1920s [2]. I expect that it will be strong enough to offset the inflationary consequences of the Biden administration's inflationary policies. So far, so good [3].

So for now, I remain in the camp anticipating a transitory rebound in the inflation rate in the 3.0%-4.0% range in coming months before it settles back down to 2.0%-2.5%. Stay tuned. ______________________

[1] See my LinkedIn article, "Inflation Was Sooo 1970s! Will It Roar Back in the 2020s?" December 12, 2020.

[2] See my LinkedIn article, "Comparative Roaring '20s," December 1, 2020.

[3] See my LinkedIn blog on productivity.

Dr. Ed Yardeni
Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research for institutional investors. In this blog, we highlight some of the more interesting relationships and developments that should be of interest to investors. Our premium research service is designed for institutional investors.

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