The U.S. economic policy in 2021 faced severe criticism from economists, including both Republican loyalists and Democratic economists. Larry Summers, who served as the chief economist under the Obama administration, called President Biden’s spending bills the “least responsible macroeconomic policy” in decades. Mohamed El-Erian, a cautious economist, criticized the Federal Reserve for not raising interest rates in 2021.
These criticisms were based on the belief that high inflation would occur and that controlling it would be painful and result in high unemployment. However, the economy has defied these predictions. Inflation has decreased despite ongoing employment strength, indicating that the policy choices of 2021 have not caused any lasting damage.
The progress made against inflation has been remarkable, with estimates showing inflation below 3 percent over the past three months. This steady decline aligns with the Federal Reserve’s 2 percent target for inflation. Additionally, employment has recovered swiftly from the impact of the Covid pandemic, surpassing pre-pandemic levels within three years.
Contrary to concerns about inflation eroding workers’ paychecks, the real wage of the average worker is higher now than before the pandemic. Prices have increased but have been outpaced by wages.
The temporary burst of inflation that occurred in 2021-2022 can be seen as an appropriate response to the supply chain disruptions caused by the pandemic. Raising the prices of goods in short supply is a more effective way to achieve the necessary adjustment in relative prices.
However, the public’s negative perception of the economy does not align with the positive economic reality. This disconnect may be attributed to the shock of inflation re-emerging after a period of price stability, and the public’s failure to fully recover from this shock.
While there are debates about the impact of the policy choices on inflation, comparing inflation rates in the United States and Europe suggests that U.S. policies may have influenced inflation to some extent. However, it is unlikely that a different approach would have significantly altered the public’s view of the economy.
In conclusion, while there may have been room for improvement in fiscal stimulus and interest rate policies, the current state of the economy is strong. The criticisms of the Biden administration’s early policies may have more to do with political perception than with lasting economic damage.