Inflation, politics, and policy

Between the Russian invasion of Ukraine and COVID outbreaks in China, it certainly seems likely that supply shortfalls and upward pressure on prices will continue.  This raises difficult questions about politics and economic policy.

On the political side of the ledger, I think that President Biden’s strategy should be predicated on continued inflation; if inflation subsides people will be happy and he will benefit politically no matter what he does or says now.  He can take some actions to rein in inflation, and recommend others to Congress and the states, but it’s doubtful these will have much visible impact.  So it seems to me that he should state that the war and our sanctions on Russia will lead to global shortages and push prices up, at least for a time, and he should tell Americans that when they pay more for gas, they are making a sacrifice for the people of Ukraine, a contribution to the war effort.  If hardship is likely, try to let people feel good about it by framing it as a sacrifice for a larger cause they believe in.  So far President Biden has rejected this approach in favor of optimistic talk that will open him up to attack if inflation continues, and that will not help him much if inflation subsides.  I really don’t get it.

Macro policy is way over my pay grade, but with that very important caveat it’s not obvious to me that the Fed should tighten.  As many have pointed out, fiscal policy is set to become contractionary, real interest rates are not as low as they seem, and wages are rising more slowly than prices, all of which will help to bring demand and supply into better alignment.  So modest tightening by the Fed seems fine, but I don’t see the need for a sharp increase in rates.  And another question, why is it taken for granted that the current bout of inflation will lead to a recession (e.g., by Summers here)?  Is the assumption that the Fed will eventually over-react, or that a recession will in fact be needed to restore price stability, or what?  Why can’t rising real interests rates, falling real wages and relaxation of supply constraints lead to a moderation of inflation with continued growth and full-ish employment?  Of course this may not happen, but what is the theory that suggests a sharp rise in interests rates will lead to a better outcome?  Is it a political theory or an economic theory?