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Inflation and the Trump Factor

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Because inflation is a cost spread lightly over everyone, whereas unemployment lands especially hard on specific individuals and families, it’s natural for economists to urge the Federal Reserve to accept a little more inflation, a little longer, to protect employment and strive for a soft landing.

This is a reasonable argument and many are now making it. The problem is, it will remain appealing after the midterms and is likely to become even more so in the runup to 2024 if Donald Trump is running.

Don’t underestimate how much the determination to prevent a Trump restoration now permeates the establishment, with quite a few Republicans quietly on board. You may have noticed Democrats are investing in a big televised Jan. 6 pseudo-prosecution for one reason: to inoculate America against a Trump revival that Democrats would likely only be able to oppose with the lackluster Joe Biden or the lackluster Kamala Harris.

Many of the institutions that matter most—the press, Wall Street, university economics departments—already can be heard sounding off on the need to avoid an ’80s-like recession even if the cost is more inflation. Jerome Powell and his Federal Reserve colleagues are hardly insensate to the risk that their inflation-fighting actions might bring Mr. Trump back to power.

It’s not too soon to begin thinking about the consequences if control over inflation is to be sacrificed in this effort.

The great inflation of 1946-48 began and ended under a single president, Harry Truman, because, in essence, the demobilization of workers and factories from the war effort was a trick the government could pull on the economy only once. The great inflation of the 1970s, in contrast, persisted for more than a decade, with many false dawns, because politicians at every step preferred to accommodate inflation rather than fight it. Yet none really foresaw the consequences of this choice.

Persistent inflation proved to be a dagger aimed at certain tried-and-true habits of the federal government. It blew up a longstanding tax code with high top rates and downward creeping brackets that automatically hiked taxes on the middle class. Inflation blew up a sprawling federal establishment devoted to trying to regulate the price and availability of transport and energy across the national economy.

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Lost on voters at the time was just how coherently government ended up responding to this crisis, with the Carter deregulations, the Reagan tax reforms, and the Fed’s turn toward Milton Friedmanesque monetarism. It’s no exaggeration to say the 1970s inflationary upheaval produced the resurgent ’80s and ’90s.

If anything, inflation’s potential to lay waste to near-and-dear but outmoded government arrangements is even greater today. Back in 1977, when President Ford handed over to President Carter, the national debt was 34% of gross domestic product. Today it’s 125% thanks to a blossoming federal role in directly supporting the consumption of vast numbers of Americans—the 75 million who get some combination of Medicare, Medicaid and Social Security, the 98 million who receive veteran benefits, college aid, rental assistance, ObamaCare, food stamps, etc.

These transfers are financed by chronic deficits. Under the impact of inflation, if the average interest rate were to rise from 1.5% to 5% (as recently as June 1996 it was 7.1%), the federal government’s interest bill would balloon from $400 billion to more than $1 trillion. Politicians would face an unhappy choice of whether to blow up their careers with benefit cuts, tax hikes or increased borrowing regardless of the worsening effect on inflation—in short, a crisis of the welfare state.

To underestimate America is to underestimate its much reviled elites. Presidents Reagan and Carter were ideological opposites and yet got the job done. Episodes of competence continue to be seen periodically: the Giuliani crime reduction in New York, Gina Raimondo’s reform of Rhode Island’s pension system, the Trump administration’s vaccine initiative.

Just out from the Hoover Institution’s John Cogan and Kevin Warsh is a reform plan that seems timed for the moment, reminding us of the private sector’s role as the prime engine of growth. Reasons for optimism are never lacking.

Less encouraging is the rise of the “woke” corporation, or what I think of as Larry Finkism, in honor of the chairman of the world’s biggest asset manager, BlackRock.

Mr. Fink is justly famous for his annual letters to America’s CEOs chiding them to adopt the latest MSNBC-approved wisdom on politics and policy. Then again, if you remember the 1970s his missives might strike you as an updated expression of the three-martini lunch—i.e., a business honcho indulging himself with on-the-job consumption, aka an untaxed perk.

In the next chapter of her story, America is likely to need better than this from her elites, whether or not Mr. Trump is back in the White House.

Potomac Watch: Americans need a serious accounting of what happened on Jan. 6, 2021. Democrats assured they won’t get one. Image: Jabin Botsford/Bloomberg News

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