But Democrats also tend to use debt to fund government spending.
(Photo: dpa)
Olivier Blanchard is not one of those economists who is now saying: We warned you! The former chief economist at the International Monetary Fund (IMF) shows no sign of satisfaction, although what he predicted is now happening: US inflation is reaching a high level of 7.5 percent and the US Federal Reserve (Fed) is threatening to get out of control .
With his warning last March, however, Blanchard had less in his sights the Fed than the government under US President Joe Biden. He wasn’t worried about the national debt, because the government has virtually inexhaustible sources of money on the capital markets. Instead, he criticized the huge boost in government spending, most of which went directly to consumption or was saved for future consumption.
This generous financial policy also has structural reasons: A country with a weak safety net for economic and social crises can only react with a large-scale injection of money if a disaster like the corona pandemic hits.
But the Democrats, Biden’s party, also tend to use debt to finance government spending instead of taxes, which are difficult to enforce politically. While taxes siphon off liquidity, this is not the case with debt – and so government spending is heating up the economy unchecked.
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The left wing of the Democrats in particular is also driven by the ideology of Modern Monetary Theory (MMT). Their representatives don’t want to be partly to blame for the inflation, but in fact they have initially lent a certain intellectual charm to the willingness to spend on credit.
purchasing power eaten up
Biden’s fiscal policy is now boomeranging in two ways. The purchasing power he gave voters is being eaten up by inflation. And that reflects back on him politically as well. It may well be that inflation will subside in the second half of the year – then the price level will be measured against the high values of the previous year. However, the effect will come too late for the congressional elections in the fall.
Another problem that can also weigh politically: the concern that the Fed is overreacting increases with every tenth of a percentage point of inflation. This makes the markets nervous.
The concern cannot be completely dismissed: if the Fed tightens the reins now, it will only have a full impact in a year or two. By then, the economy will have cooled down anyway – and another election is not far off either.
More: Inflation becomes the biggest problem for the US President in the election year